BUILDING NATIONAL COMPETITIVENESS IN SOUTHEAST EUROPE
NATIONAL COMPETITIVENESS REPORT FOR ROMANIA
FINAL REPORT
Prepared for: U.S. Agency for International Development Compiled by: J. E. Austin Associates, Inc.
Sponsored by: USAID E&E Bureau Contract No. PCE-1-00-98-00016-00 Task Order No. GBTI-008 Nathan-MSI SEGIR GBTI Consortium
December 2001 Romania National Competitiveness Report
TABLE OF CONTENTS
Executive Summary Chapter 1 - lntroduction Chapter 2 - Recent Economic Developments Chapter 3 - National Platform for Competitiveness 3.1 Political Stability 3.2 Macro- and Microeconomic Environment 3.3 Legal and Institutional Environment Chapter 4 - Competitiveness Benchmarking 4.1 Definition 4.2 Objectives of the Benchmarking Report 4.3 Methodology 4.4 Uses and Limitations of the Study 4.5 Overview of Competitiveness Categories 4.6 Summary Chapter 5 - Trade and Investment Competitiveness 5.1 Linkages between Trade, Investment, and Growth 5.2 Approach 5.3 Current Trade 5.4 Global Competitiveness of Romanian Exports 5.5 Current FDI Flows 5.6 Competitiveness of the Romanian FDI Environment 5.7 Opportunities Chapter 6 - Industry and Firm-level Competitiveness 6. I lntroduction 6.2 Apparel 6.3 Information Technology 6.4 Tourism 6.5 Wood and Furniture Chapter 7 - Competitiveness Constraints in Romania 7.1 General Competitiveness Constraints 7.2 Industry-specific Competitiveness Constraints Chapter 8 - Analysis of Private-Public Dialogue in Romania 8.1 lntroduction 8.2 Overview of Legislation Change Process in Romania 8.3 Recent Experiences Chapter 9 - Recommendations ANNEX 1: Competitiveness Benchmarks ANNEX 2: Competitiveness Bibliography
J.E. Austin Associates, hc. i Romania National Competitiveness Report
EXECUTIVE SUMMARY
Introduction With the objective of supporting the competitiveness building process in Southeast Europe, the Europe and Eurasia Bureau of USAlD has asked J. E. Austin Associates, Inc. (JAA) to carry out a Competitiveness Assessment to instigate a National Competitiveness Building Process in Romania, Croatia, Macedonia, and Albania. 'This brief summary recapitulates the main findings of JAA's work in Romania under USAlD Task Order No. GBTI-008 of the Nathan-MSI SEGlR GBTl PCE-I-00-98-00016-00 contract.
Economic Overview Romania's progress in stabilization and reform since 1989 has been limited compared to many transitional economies in Europe. The country's foreign debt burden, the impact of the UN trade embargo on Yugoslavia between 1992-95, and most important, its adoption of stop-and-go macroeconomic policies have all contributed to low economic growth, high and variable rates of inflation, and periods of severe balance of payments pressures. In addition, the country's politics has experienced considerable chaos since 1989, and there has been a marked failure to create a consensus within the government and among various member parties on how to implement economic reform. This has contributed to Romania's sluggish economic performance over the past decade.
Romania suffered from negative economic growth rates in 1997 and 1998. Inflation has been historically high and fluctuating and Romania's current account deficit has also been a severe problem.
Faced with the threat of imminent crisis, the government took decisive measures in early 1999 to stabilize the economy. 'These measures consisted of strong fiscal correction, introduction of tight monetary and income policies, and strong measures to restructure the banking sector. These policies have succeeded in reducing the current account deficit substantially and the fiscal deficit was also brought down in 1999. However, the market outlook remained cautious with continuing economic recession, and a negative GDP growth rate of -3.2% in 1999.
In 2000, Romania witnessed a slight economic recovery driven by growth in exports and investment. For the first time after three consecutive years of decline (1997-99)', GDP grew at a positive rate of 1.6%. Exports increased dramatically by 25%, mainly reflecting stronger foreign demand, and the impact of a sharply depreciated local currency. Gross domestic investment also increased by 5.5%. The fiscal deficit was slightly higher than in 1999, and there was also a pick-up of 17% in imports, a result of stronger demand for immediate and capital goods as well as higher fuel prices2. In addition, inflation had not yet been brought under control, and the average rate for the year remained high at 45.6%3.
- - - IMF Staff Country Report No. 001159, December 2000: GDP contracted by 6.1% in 1997,5.4% in 1998, and 3.2% in 1999. * EIU Ibid.
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Registered ~~nemploymentwas estimated to have been around 11% since 19984. The Romanian labor force is highly educated; but the country's declining birth rate and aging population is expected to put a further strain on its funding of pensions, social security, and medical systems. Labor regulations are mostly in compliance with international practice, and are not viewed as impediments to doing business in Romania. However, employer social contributions are considered high, which appears not only to encourage payment evasion among employers, but also to discourage employment generation5.
Overall, significant changes have been made in Romania's laws and legal institutions to improve its investment framework, and to unify the system with international and European standards. However, Romania has faced considerable problems at the implementation level. Examples include persistent corruption, restrictive bureaucracy in land/construction pem~itprocedures, cumbersome customs procedures at the borders, poorly trained customs staff, and bureaucratic hurdles in the approval procedures for special types of investment. There is also much room for improvement in the judicial system, including the acceleration of judicial procedures; and better pay, training, and status for err~ployeesof the judicial system in order to attract and retain highly qualified staff.
Competitiveness Benchmarking JAA has carried out a competitiveness benchmarking exercise to reflect how Romania ranks relative to the other countries in Southeast ~urope~,the EU accession countries, the EU countries themselves and all countries of the world for which data was available in the areas that are generally understood to be closely correlated to competitiveness. Informed by competitiveness theory and by the methodologies used by the World Economic Forum, Harvard University and the Institute for Management Development along with its own work in 100 countries over 15 years, JAA has selected 40 indicators related to eight competitiveness-related categories: economic performance, exports, investment, financial sector, human resources, science/technology, infrastructure and government policy.
Although it is a larger country that is somewhat disconnected from the rest of the Balkans and with a larger population, Romania shares some of the common institutional problems of the Southeast Europe region. While the country ranks better in the human resources, the infrastructure, and the investment competitiveness indicators, it does poorly in economic performance, financial sector, and policy environment rankings. The country has a problematic financial sector and a poor record of economic growth. However, the export growth of Romania has shown some recovery over the last couple of years.
Other problems are related to instability and conflict in Southeast Europe, Romania's poor domestic financial sector and a policy environment hampering economic growth. In particular, the slow pace of reforms has further limited Romania's competitiveness. Also typically for Southeast Europe, Romania's financial sector is underdeveloped. However, relatively large foreign investments have shown that Romania's opportunity lies with its
EIU, CMF, PriceWaterhouseCoopers Business Guide to Romania, PriceWaterhouseCoopers, 1999: Employer social contributions are considered high, accounting for 45-53% of gross salary, including 30% in social security (but up to 40% in certain industries), 7% to the health fund, 5% to the unemployment fund, and 2% to the education fund. Croatia, Bulgaria, Macedonia, and Albania
J.E. Austin Associates, Inc. E-2 Romania National Competitiveness Report comparably large market, human resources, and the continued development of a viable export sector. Even though the Government of Romania recognizes the importance of the information technology sector, computer availability is very low in Romania.
Wh a well-educated workforce and a sound privatization program, the country has managed to attract relatively large amounts of foreign investment in comparison to the rest of Southeast European countries, probably linked to the privatization. Attracted FDI will prove beneficial in the years to come, but did not have an immediate impact to counterbalance the recent recession that hit Romania. The key issues that Romania faces are microeconomic liberalization, which will open 1.1~ business opportunities, and macroeconomic stabilization, which will lead to hardening of budget constraints. Romania needs to go ahead with its introduction of reforms that are necessary for a successful transition but were delayed due to the slow progress of the public sector, and move quickly to address the limitations revealed in the indicators below.
Trade and Investment Competitiveness The trade figures for Romania over the 1994-1999 period indicate an increase in trade deficit from 1994 to 1998 and a sharp decline from 1998 to 1999. Due to trade policy measures applied by the Government of Romania, imports decreased, leading to an improvement in Romania's trade balance. While the share of the private sector increased from 40.3% to 65.6% in exports between 1994 and 1999, it has increased from 39.2% to 71.9% in imports for the same period. The volume of Romanian exports increased in 1999, but at a slower pace due to the unfavorable trends from the international market and a lower production level in industry and agriculture. The export volume decreased mainly with South Asia and the Russian Federation, following the financial crises that occurred in these regions, while exports increased significantly with the EU and CEFTA countries, mainly due to the Free Trade Agreements.
The assessments by the International Trade Center in 1998 indicate that men's and boys' trousers, overalls, and shorts; sweaters, sweatshirts, and waistcoats; ignition wiring sets; others used for vehicles, aircraft, and ships; and line pipes are some of the export products in which Romania has performed very well. These were dynamic products, which grew faster than the world trade in general, and in which Romania has been able to outperform world market growth and increase its share of world imports. Lumber, wooden furniture for other use, and Portland cement are sectors that represent challenges for Romania. While the international demand has been growing at above- average rates, Romania's exports of these products have either been falling behind or grown less dynamically than the world trade, causing Romania to lose its international market share. Romania's share in the world import markets in cargo vessels; other sports footwear; parts of footwear; lumber; women'slgirls' blouses, shirts and shirt blouses; women'slgirls' jackets and blazers; and men'slboys' shirts has grown between 1994 and 1998, even though these markets were declining or growing at a below average rate worldwide during the same period. From a strategic perspective, Romania needs to identify and target niche markets that will generate positive trade performance.
Since 1990, Romania's stated policy has been encouraging foreign investment. As of December 1999, the level of foreign direct investment stock in Romania was definitely much lower than in some other countries in Central and Eastern Europe (Poland - US$30 billion; Hungary - US$19 billion; Czech Republic - US16 billion). Foreign direct investments to joint ventures and greenfield investments were characterized by a
J.E. Austin Associates, Inc. E-3 Romania National Competitiveness Report sinuous evolution, with a clear downward trend during the past four years. During the first eight months of 2000, a t~istoricallylow level of foreign direct investments had been achieved (a little over US$3 rr~illionper month - which is much less than 1991 levels). A significant impediment that hampers the ability of Romania to attract FDI is the country's unpredictable legal and regulatory system. The tax laws are constantly changing and unevenly enforced. Tort cases can require lengthy, expensive procedures and judges' rulings face uncertain enforcement. Other factors are an unevenly developed infrastructure, lack of proper market institutions (especially in the banking sector), legal and institutional instabilities, and a slow privatization process.
Competitiveness Constraints Romania faces various weaknesses in its political and economic environment that hamper its ability to achieve higher competitiveness, and, therefore, better overall economic development. Based on JAA's preliminary study of the Romanian economy and industry sectors, major constraints to the country's ability to achieve higher competitiveness, and, therefore, better overall economic development, are summarized below. It is worth noting that many of these constraints are similar to those confronted by other transitional economies in Southeast Europe.
General Com petitiveness Constraints Although the government has indicated its commitment to furthering econorr~ic reform, there is uncertainty about sustained political stability in Romania. Romania has been able to marginally improve the country's overall economic performance for 2000 after three consecutive years of decline, but weak and unsustainable economic growth is detrimental to investment. There is a need for political consistency and persistency about how and what to reform. Romania lacks an action-oriented roadmap for its development, and the capacity to translate words into concrete action7. The quality of law enfomement is also an area of serious concern. A weak governance system deters investment. Though significant improvements have been made to the legislation and institutional framework, a deficient policy framework discourages both domestic and foreign investors. Reform has been carried out in the banking sector, but the system is still weak, with a low level of intermediation, high cost of capital, severe lack of financial discipline, and poor allocation of credit8. Corruption and non-transparent procedures deter private investment. Romania's poor physical infrastructure erodes its competitiveness and is a constraint on its economic development. Delayed engagement in higher-technology and higher value-added economic activities wears down Romania's competitiveness. Lack of focus on international markets combined with its domestic market could undermine Romania's competitiveness.
' Summary on feedback on World Bank's draft Country Assistance Strategy for Romania, February 2001 IMF Staff Country Report No. 0 1 / 1 6, January 200 1
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Romania has a cheap labor force, but lacks a market mentalify and management system as well as access to information about both domestic and foreign markets in order to compete better in a new global market context. There is a lack ofprivate sector consultation in the government's policy-making.
Industry-specific Constraints Based on consultation with key stakeholders and counterparts in Romania, four industry sectors of key importance to the Romanian economy were selected for in-depth analysis. These were apparel, information technology, tourism, and the wood and furniture sectors. A SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis and a Competitiveness Diamond analysis were performed for each sector. The constraints that hamper the competitiveness of each of these sectors are summarized below:
a. Apparel: Romania has so far relied on the exploitation of a low-cost and labor- intensive strategy to compete with other countries. As in many other SEE countries, the industry has experienced an erosion of its competitiveness over the past decade. The following are some of the main factors that have contributed to this decline: Declining labor cost advantage, due to competition from other low-cost countries; Strong competition from illegal imports of finished products; Delays in developing and securing a strong access to foreign markets; lnadequate information about both domestic and external markets; hadequate access to financing for domestic private firms; A lack of product differentiation; A lack of foreign investment in the sector, which is considered a crucial source of management know-how, technology transfer, and access to foreign markets; Increasing transaction costs due to administrative bureaucracy; lnadequate recapitalization and restructuring efforts to infuse new technology into the industry, and to establish industrial linkages that help Romania engage in high value-added activities; Alack of strong private sector investment, which is considered a driving factor behind any country's sustained growth and employment generation; A lack of strong individual companies that pioneer and lead the technological change and upgrade the processes in the industry; A lack of market-oriented management and marketing skills that can improve efficiency in the industry, make Romanian brand names better known in the world markets, and proactively find new markets for Romanian products; and A lack of an overall industrial strategy and coordination/cooperation within the industry in order to acquire new technology, share market information, or access new markets.
6. lnfonation techno lo^^^ (IT): Romania has built up reasonable levels of technological capability in the production of both hardware and software following the building of its first computer in 1957.' Nevertheless, its IT during communism was largely based on western technology, and there was a major technological lag between Romanian hardware and that available in Western countries. Since 1989, Romania has been trying
Romania's Hardware and Software Industry: Building IT Policy and Capabilities in a Transitional Economy, Mihaiela Gnmdey and Richard Heeks, 1998
J.E. Austin Associates, Inc. E-5 Romania National Competitiveness Report to further develop the sector, including the gradual liberalization of the telecommunications sector and the encouragement of foreign investor participation in the IT sector. However, the development of Romania's IT remains limited. Major impediments include the following: An inadequate legal and regulatory framework to support the sector, particularly software exports; Ineffective protection and enforcement of intellectual property rights; A lack of reliable electricity supply, and of reliable and pervasive telecommunications infrastruct~~rethat links both domestically and internationally, to support Romania's software exports; A lack of a sizeable or demanding domestic market that can stimulate the sector's development, or attract IT multinationals into collaborative relationships with local partners to serve such a market; A lack of updating of the current technology levels; A lack of information about both domestic and foreign markets; Limited participation of foreign IT investors who could introduce new managerial know-how and technology to the industry; A lack of entrepreneurship, marketing, and management skills that could bring more international exposure and experience to domestic firms; A limited R&D base, and insufficient investment in R&D for new technologies and software; A lack of private sector consultation in policy formulation to support the industry; and A need for more proactive policy support from the government to stimulate the growth of the IT industry and make it internationally competitive. c. Tourism: Romania's rich natural resource endowment offers many opportunities for strong tourism development. The sector so far has been following a low-end, low-price competition strategy, and suffers from a lack of quality and strategy that could increase its competitiveness relative to other countries in the region. Major constraints for the Romanian tourism industry include the following: Absence of a National Tourism Strategy, resulting in an erosion of sector competitiveness, so that the low-cost competition strategy is failing due to lower prices from other countries in the region; Delayed engagement in high-end and more sophisticated tourism products; Limited knowledge of outside markets and high-end product segments; Degrading and inadequate infrastructure facilities, including roads, hotels, telecommunications, airports, and utilities; A lack of quality market-oriented customer service; A lack of management and marketing skills that can increase efficiency, attract more clients, and generate high-end demands for the sector; A lack of strong private sector investment in the sector; and An inadequate legal and regulatory framework to support the sector. d. Wood and Furniture: The wood and furniture industry plays a significant role in Romania's economic development. In 2000, furniture exports accounted for 4.6% of total exports, while exports of wood products (excluding furniture) were 5.4%". The
10 See Romania: Chapter 6: Industry and Firm-level Competitiveness
J.E. Austin Associates, Inc. E-6 Romania National Competitiveness Report industry faces a number of constraints for its long-term development, which can be summarized as follows: A sector strategy based on price-based competition, which erodes the sector's competitiveness over time due to competition 'from other countries; Delayed engagement in high-end and more sophisticated products; Weak domestic product design capacity; Weak domestic brand names; Limited domestic purchasing power; Weak manufacturer bargaining leverage due to the industry's low firm concentration; Limited knowledge of outside markets and high-end product segments; Dependence on a few buyers and intermediaries, and lack of access to foreign markets and their distribution networks; A lack of a transportation cost advantage due to degrading and inadequate infrastructure facilities; A lack of quality market-oriented customer service; A need to maintain consistency in product quality; A need to update the current technologies and equipment used; A lack of management and marketing skills that can increase efficiency, attract more clients, and generate high-end demands for the sector; and An inadequate legal and regulatory framework to support the wood and furniture sector.
Recommendations for Next Steps Building Romania's competitiveness requires a complex set of mutually reinforcing activities at the level of the firm and the industry cluster, reinforced by policy and institutional action at the national and local government levels. Learning from nations that have built prosperity quickly and aided by the foregoing analysis, one can formulate recommendations that deal with the private sector, with the public sector and with the dialogue that connects them.
Private Sector Romanian firms will need to invest in learning how to take advantage of opportunities to serve European markets. Companies that serve the Romanian market only can study trends in countries that have longer experience with privatization, liberalization and globalization and selectively test the introduction of innovations in Romania. Firms that are not competitive in their particular sectors will need to take stock of their human, capital and organizational resources and then migrate to other market segments or even industries.
Competitiveness requires the ability to cooperate as a cluster to be able to achieve success, as no one firm can do it all. Competitiveness depends on the ability to form good alliances and partnerships. At the industry level, business associations can participate in efforts representing their business sector to the government. Business associations, working with the Government of Romania, can also develop international trade and investment linkages to get access to markets and technology. But this undertaking requires greater communication and cooperation between the private sector and the public sector.
However, it is important to gather together as an industry cluster-that is, the entire value chain plus the related and supporting industries. The industry cluster can then
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benchmark the industry, develop industry strategies and implement specific action initiatives to boost competitiveness. These will vary by industry. For example, the tourism cluster should formulate specific strategies for attracting higher-spending tourists to Romania. The IT sector should explore initiatives for E-Government, reducing bandwidth constraints, boosting software exports and retaining talented professionals. The apparel sector will need to move beyond its focus on providing assembly labor so as to survive after the expiration of quotas in 2005.
Industry clusters can also implement workforce development, human resource and training initiatives by working with education and training providers so that the latter adapt their programs to the needs of industry. Other initiatives for the private sector could be those of research, development, testing and certification that can add value to the industry while adapting to IS0 and similar standards.
Public Sector Policy and institutional reform can be analyzed for each industry cluster. For example, in tourism there is a need to complete the privatization agenda and to reduce taxes on the sector while using some of these tax revenues to co-finance initiatives that the private sector itself could undertake to carry out competitiveness initiatives for its sector. The industry itself is in the best position to design and implement initiatives to migrate from low-end tourism to higher end markets such as conference tourism, adventure tourism, and eco-tourism.
In the IT sector, the government should promote E-Government, address constraints of bandwidth availability and cost, promote the use of computers in schools and work with universities and training providers to improve the relevance of education programs to the changing needs. The introduction of E-Governance systems contributes to transparency and reduces corruption by making information and services available on the Web.
Romania badly needs a coherent investment promotion strategy and a new agency with a structure informed by best practices and taking into account Romania's specific strengths and weaknesses and the opportunities presented by access to EU markets. Romania can learn from best practices relevant to Europe such as in Ireland, Scotland, the Netherlands, Hungary, and the Czech Republic.
Following the example of Ireland, the Government of Romania, with the help of leading think tanks in the country, should publish an annual Romania Competitiveness Benchmarking report that could provide sound data on Romania's competitiveness in areas related to investment, exports, technology, human resources, economic policy, economic performance, and infrastructure. This would help to inform government ledders and also industry leaders with regard to the strengths and weaknesses of Romania relative to other EU accession countries while helping to inform the efforts to set priorities and monitor implementation.
Romanian Competitiveness Council (RCC): It is recommended that the key private sector leaders establish a Romanian Competitiveness Council to institutionalize dialogue between the private and public sectors. This Council would establish priorities for reform and communicate these clearly to the government and then monitor implementation. It would also undertake its own initiatives and help coordinate the work of various industry clusters.
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The Council would set the initiatives such as the following: Conduct annual survey of SMEs and systematically remove bureaucratic constraints to business formation and entrepreneurial activity; Support the institutionalization of private-public dialogue by identifying the priority concerns; and Cooperate with the government in negotiating access to foreign markets on good terms.
In the Council's early months, it would be useful to have encouragement from the Government of Romania and it would be helpful to have technical and perhaps even financial support to jump-start such a Council. The Council would meet monthly or more often if necessary and would commission specific initiatives designed to build Romania's competitiveness. It would review progress on these and provide leadership and vision.
The Council should work through existing business associations and research institutes and not attempt to duplicate them. It should also build on prior research done on Romanian competitiveness, on policy reform and on specific industry clusters, rather than doing new and repetitive research. The focus should be on action rather than study and on building a self-reinforcing virtuous cycle of private-public cooperation to implement change.
'There are many things that must be done to build the competitive advantage of Romania. The recommendations above suggest some of the priorities that need to be undertaken. More important, this study recommends a mechanism in the Romanian Competitiveness Council to move to action while building trust and private-public partnership that are necessary to a strong economy and civil society.
It is impossible in a study of four countries with limited scope and resources to accurately address all of the constraints or to lay out a comprehensive set of well- sequenced recommendations. Nonetheless, it is hoped that this report will serve as a stimulus for discussion and analysis and thereby provide Romania's leaders with the relevant information needed for consensus and allow them to move fotward with a preliminary action plan for strengthening Romania's position globally.
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CHAPTER 1 - IN'TRODUCTION
Wrth the objective of supporting the competitiveness building process in Southeast Europe to ensure that Stability Pact activities accelerate sustainable recovery from financial and political instabilities in the region, the E & E Bureau of USAlD has asked J. E. Austin Associates, Inc. (JAA) to carry out a "National Competitiveness Buildingn exercise in Macedonia, Croatia, Romania, and Albania. The objective of this report is to present the findings of the work undertaken by JAA in Romania under Task Order No. GBTI-008 of the Nathan-MSI SEGlR GBTl PCE-I-00-98-00016-00 contract.
The methodology followed in this exercise started with a benchmarking exercise that ranked the four countries against all countries in the world, the EU, EU accession countries and Southeast European countries. Visits were made to all countries and subcontractors in each country were identified to apply competitiveness tools to selected sectors and a central point to convene issues on competitiveness. A regional conference to expose the participants from public and private sectors of all countries to the concept of competitiveness and competitiveness benchmarking was organized in Macedonia. As a result of this initial exercise and the demand from Croatia, an in-depth competitiveness exercise has been activated by USAlD Croatia.
This exercise had certain lirr~itationssuch as a limited budget and level of effort to cover all four Southeast European countries. Thus, this report should by no means be treated as a substitute for a major study on competitiveness. Due to the limited budget available, JAA was unable to apply competitiveness tools on site together with the local counterparts that were identified in each country. Also, workshops, which usually are performed once the leadership in a country is informed about the competitiveness concept, were not utilized. A presentation on the findings of the study was given to the Romanian public and private sector representatives in June 2001. This report includes the feedback received from the participants during that presentation. However, time delays were experienced in meeting the expected completion date for the study as a result of elections in Albania, ethnic conflicts and civil unrest in Macedonia, and as the Macedonian subcontractor was called in to serve the Macedonian Army.
The report is composed of nine chapters. Chapter 1 provides an introduction to the report.
Chapter 2, 'Recent Economic Developmentsn, summarizes the latest economic performance of Romania to provide the reader with an understanding of the country's development efforts and results of these efforts.
Chapter 3, 'National Platform for Competitivenessn, reviews Romania from a political stability point of view, and analyzes the microeconomic and macroeconomic environment in the country. The chapter ends with an analysis of the legal and institutional environments that businesses in Romania operate in.
Chapter 4, 'Competitiveness Benchmarkingn, summarizes the findings of the competitiveness benchmarking exercise that ranks Romania relative to the EU, EU accession countries, Southeast Europe and all other countries of the world for which
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data are available in areas that are generally understood to be closely correlated to competitiveness.
Chapter 5, "Trade and Investment Competitiveness", examines the trade and investment flows in and out of Romania and lays out the trade and investment competitiveness of Romania based on the analyses carried out by the International Trade Center.
Chapter 6, "Industry and Firm-level Competitivenessn, presents the competitiveness of four important Romanian industries and the firms that operate in these sectors, namely Tourism, Information Technology, Apparel, and Wood and Furniture.
Chapter 7, "Competitiveness Constraints in Romanian, summarizes the competitiveness constraints in Romania from both general and industry-specific perspectives.
Chapter 8, "Analysis of Public-Private Dialogue in Romanian,reviews the current status of the dialogue between the private sector and the public sector.
Chapter 9, "Recommendationsn, presents the recommendations to increase the competitiveness of Romania on three different levels: firm, industry and government levels. This chapter ends with the National Competitiveness Initiative, which presents the steps that should be taken to raise capacity and increase active participation of stakeholder representatives in a dialogue about developing industries in the target clusters.
Annex 1, "Competitiveness Benchmarksn, is a presentation of competitiveness benchmarking graphs and data for all indicators selected.
Annex 2 is the Competitiveness Bibliography.
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CHAPTER 2 - RECENT ECONOMIC DEVELOPMENTS
Compared to many European transitional economies, Romania's progress in stabilization and reform since 1989 has been limited. Contributing factors include the country's foreign debt burden, the impact of the 1992-95 UN trade embargo on Yugoslavia, and most important, its adoption of stop-and-go macroeconomic policies. As a result, Romania has experienced low economic growth, high and variable inflation rates, and severe balance of payment pressure periods. Romania has suffered from negative economic growth rates of -6.1% and -5.4% in 1997 and 1998, respectively". lnflation has been historically high and fluctuating, reaching 136.7% in 1994, declining to below 40% over the next two years, and soaring again to 154.8% in 1997. By 1998, the rate of inflation had dropped from these high levels to 59.1 %I2.
Romania's current account deficit has also been a severe problem. Since the early 1980s the deficit has been increasing to reach US$3.1 billion, or 7.5% of GDP in 1998, principally due to persistent trade deficits and high interest payments on external debts13.
Faced with the threat of imminent crisis, the government took decisive measures in early 1999 to stabilize the economy, including strong fiscal correction, improvements in external cost competitiveness, tight monetary and incomes policies, and the closure of a large insolvent state bank (Bancorex). These policies have succeeded in reducing the current account deficit substantially to 3.8% of GDP in 199914.The fiscal deficit was also brought down from 5% of GDP in 1998 to 3.8% of GDP in 1999. However, the market outlook remained cautious with continuing economic recession, and a negative GDP growth rate of -3.2% in 1999. lnflation remained high, averaging 45.8% for the year, and closing the year at 55%15.
In 2000, Romania witnessed a slight economic recovery driven by growth in exports and investment. After three consecutive years of decline (1997-99)16, GDP grew at a positive rate of 1.6% for the first time. Exports increased dramatically by 25%, compared to the previous year's 8.4%, mainly reflecting stronger foreign demand, and the impact of a sharply depreciated local currency. Gross domestic investment also increased by 5.5%, compared to the previous year's contraction of 10.8%.17 The fiscal deficit was slightly higher than in 1999 at about 4.3% due to the government's increased spending on wages and a shortfall in excise, VAT and social contribution receipts1'. However, there was also a pick-up of 17% in imports, after a decline of 10% in the previous year, and of almost 20% over the years 1997-99. This increase in imports came as a result of stronger demand for immediate and capital goods as well as higher fuel pricesqg.In
" IMF Staff Country Report No. 00/159, December 2000 '* IMF Staff Country Report No. 0011 6, January 2001 l3 IMF Staff Country Report No. 001159, December 2000 l4 Ibid. l5 Ibid. l6 IMF Staff Country Report No. 0011 59, December 2000: GDP contracted by 6.1% in 1997, 5.4% in 1998, and 3.2% in 1999. I' EN. The leu depreciated by 30% against the US dollar in 2000 and by 25% against the euro. '' IMF Staff Country Report No. 001159, December 2000 l9 EIU
J.E. Austin Associates, Inc. 3 Romania National Competitiveness Report addition, inflation had not yet been brought under control, and the average rate for the year remained high at 45.6%".
Unemployment stood at 10.9% of the total labor force in 1994, and at 8.8% in 1997, but is estimated to have averaged almost 11% since 1998 as a result of an economic decline during the years 1997-9g2'.
20 Ibid. 21 Em, IMF,PriceWaterhouseCoopers
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CHAPTER 3 - NATIONAL PLATFORM FOR COMPETITIVENESS
3.1 Political Stability
Unlike other former socialist countries in SEE, Romania began its transition violently, with an overnight overthrow of the old political system, and the establishment of a presidential parliamentary democracy. The country's politics has experienced considerable chaos since 1989, and there has been a marked failure to create a consensus within the government and among various member parties on how to implement economic reform. This has contributed to Romania's sluggish economic performance over the past decade.
In February 2000, a new government was established, led by the Democratic Convention (DC) in coalition with the Social Democratic Union (SDU) and the Hungarian Democratic Union in Romania (HDUR). It appears that the new coalition government continues to face considerable difficulties in reconciling the goals of different member parties. Apart from the lack of consensus building, there is also concern regarding a lack of vision and direction as well as coordination of high-level policy making. This coordination is necessary to ensure consistent and appropriate macroeconomic policies in order to bring Romania out of prolonged economic and political crisis. In addition, the new government also faces tension in inter-ethnic relations and minority rights due to discrimination against the Roma, and existing illiberal legislation regarding human and minority rights. Failure to address these tensions and conflicts could clearly threaten Romania's future political stability.
'The govemment has indicated its commitment to stabilize the economy via more drastic reform measures such as those initiated in 1999. The government is also focusing on developing good relationships with neighboring countries, particularly in preparation for its integration with the EW. If Romanian economic recovery can be strengthened and sustained, it will increase public confidence in the government, and thus enhance overall political stability.
3.2 Macro- and Micro+conomic Environment
Fiscal Policy Following the collapse of the Ceaucescu regime in 1989, Romanian public finances were in a highly imbalanced state mainly due to the buildup of debt and quasi-fiscal subsidies in earlier yearsZ2, poor tax policy, and government over-spending. However, the government has embarked on a substantial program of fiscal adjustment designed to redress this desperate situation. On the expenditure side, the government has been trying to reduce expenditures on wages and pensions. By 1999, although interest
22 According to the JMF, quasi-fiscal operations were pursued from early 1990s until 1996. They took the form of (a) subsidies through the extension of directed low-interest credit by the National Bank of Romania (NE3R) to agriculture and energy-intensive sectors; (b) sharp increases in lending by state-owned commercial banks to the same sectors; (c) NBR sales of FX at an appreciated exchange rate to the energy sector; (d) a pick-up in the extension of govemment loan guarantees; and (e) a general increase in payment arrears by SOEs.
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payments, subsidies and transfers had continued to increase, reaching 5.5% (15.4% of GDP), spending on wages and salaries had dropped to around 5%. On the revenue side, the government has implemented major tax reforms, lowering income and wage taxes, and relying more on broader-based indirect taxes. These efforts increased government revenues from 28.6% of GDP in 1997 to 33.3% of GDP in 1999, and helped reduce the fiscal deficit from 5% of GDP in 1998 to 3.8% in 199923.Nevertheless, this improved deficit level could not be maintained in 2000 when higher spending on wages and salaries and a shortfall in tax collection caused the fiscal deficit to widen to 4.3% of GDP. While there has been some success in reducing the fiscal deficit, the IMF still considers Romania's fiscal situation unstable, and believes that the achievement of a sustainable fiscal position depends on further ekpenditure controls24.
Monetary and Exchange Rate Policies Romania's monetary and exchange rate policies underwent radical reform in early 1997 when the monetary policy was relieved of its quasi-fiscal functions, the exchange rate regime was liberalized, and subsidized credit by the central bank ended. Since then the National Bank of Romania (NBR) has adopted a managed-float exchange rate system, with the exchange rate, net foreign assets, reserve money, and net domestic assets all serving at various times as intermediate targets.
In 1997, confronted with large foreign exchange inflows, the NBR engaged in large purchases of foreign exchange to prevent a nominal appreciation of the local currency. By late 1997, due to limited success of these efforts and rapid wage growth, the NBR decided to loosen monetary policy. However, this failed to halt the decline in external competitiveness, and led to a worsening of the current account deficit.
Since early 1999, however, a variety of reform measures have been adopted including a considerable tightening of monetary policy. Through such tightening the NBR has sought to strike a balance between two potentially conflicting objectives: reducing inflation through a degree of exchange rate stability and safeguarding the country's external position. Although this policy has proven relatively instrumental in strengthening the foreign exchange reserves and maintaining external competitiveness and exchange rate stability, it has had limited success in reducing inflation. Inflation rose to 55% at the end of 1999, compared to 40% in the prior year. In 2000, inflation averaged 45.6% throughout the year but ended the year at 40.7%.
Banking Refonn Following the establishment of a two-tier system in 1991, Romania's banking system expanded rapidly, but state-owned banks still dominated 73% of the system's entire assets at the end of 1998. A low level of intermediation, limited credit availability, inadequate banking regulation and supervision, and high vulnerability to credit risk have characterized the banking system2=.
In the past few years, however, significant progress has been made in restructuring Romania's banking system. The regulatory and supervision framework for banking has been strengthened, with the adoption of a Central Bank Law, a Commercial Banking Law, a Bank Privatization Law; and a Bank Insolvency Law in 1998.
23 IMF Staff Country Report No. 001159, December 2000 24 IMF Staff Country Report No. 00116, January 2001 25 Ibid.
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Owing largely to the privatization of two state-owned banks (Romania Bank of Development and Banc Post), and to the closure of a large insolvent bank (Bancorex), the ownership structure of the banking system has changed substantially. The private sector as of June 2000 owned 56%, of which banks with foreign participation accounted for 44%, of the total banking assets2! Stricter requirements on loan loss provisions and capital adequacy levels were imposed on the banking system, thus increasing banks' capital asset ratios markedly from 1998 levels of 10.3% to 17.5% in 1999, and 21.4% in 2000~~.Some organizational restructuring has taken place with the goal of improving banking supervision within the NBR, and more clearly defining provisions for on-site inspections and off-site monitoring. However, non-performing loans in the banking system still accounted for about 35% of the total loan portfolio in 1999, and at mid-year 2000. Therefore, the system remains weak and vulnerable to credit risk and economic recession28.
Privatization Privatization has proceeded slowly in Romania. 'The process was initiated in 1990 when about 6,200 state-owned enterprises were converted into joint stock commercial companies. The State Ownership Fund (SOF) received a 70% share in these companies with the remaining 30% distributed to five Private Ownership Funds (~0~s)~'.
Small-scale and farm privatization were initially the dominant means of transferring firms in the SOF portfolio to the private sector. An attempt was made in 1995 to implement large-scale privatization, mainly in the form of management and employee buyouts. However, by the end of 1995, just 4.6% of SOF's assets had been transferred to the private sector; and by 1997, the accumulated privatized capital was only 1 1.7%30.
Privatization momentum has accelerated since 1998 through direct sales, tenders and auctions, as well as the involvement of investment banks and foreign investors. New proposals to boost the process were announced in November 1998, including streamlining the State Ownership Fund, which involved a 35% reduction in its staff, and the privatization or closure of 49 major loss-making companies3'. The legislation governing privatization was amended several times, and in May 1999, a new Privatization Law was passed which transfers overall responsibility for the process to the Romanian Development Agency, operating under the authority of the Prime Minister. As a result, during 1998-99, majority shares in the Romtelecom (state telephone monopoly), Romania Development Bank, and Automobile Dacia (car manufacturer) were sold to foreign investors3'.
The privatization process has been limited in Romania, as by the end of 2000 about 60% of the enterprise capital remained in state ownership". In addition, although a number of
26 IMF Staff Country Report No. 01/16, January 2001 27 Ibid. 28 Ibid. 29 PriceWaterhouseCoopers, Business Guide to Romania, 1999 30 IMF Staff Country Report No. 001159, December 2000 3' EIU 32 Ibid. 33 IMF Staff Country Report No. 001159, December 2000
J.E. Austin Associates, Inc. 7 Romania National Competitiveness Report public utilities, particularly in transportation and energy sectors, were transformed into public corporations and split up during 1998-99, they continued to be owned by the state. According to the IMF, only about 20% of all state-owned large companies have been privatized since the beginning of the transition, indicating the need for Romania to take more drastic measures to accelerate its privatization process34.
Import and Export Policy Much progress has been made in Romania toward the liberalization of the trade regime and the reduction of tariff barriers since the process started in 1990. The progress in the country's trade liberalization has been anchored in binding commitments under the World Trade Organization (WTO), which Romania became a member of in 1995, and regional trade agreements that include free-trade agreements with the European Union, the European Free Trade Agreement (EFTA), and the Central European Free Trade Agreement (CEFTA); and bilateral trade agreements with Moldova and Turkey. These efforts toward trade liberalization lay much of the groi~ndworkfor Romania's accession negotiations with the EU, which started in early 2000, and will likely lead to further crucial reforms.
Entering into force in 1995, the European Agreement with the EU aims at the elirr~ination of remaining tariffs on nonagricultural imports from the EU by 2002, and gradual reciprocal tariff reductions for agricultural products. The free trade agreements with EFTA and CEFTA countries largely reflect the trade provisions of the European Agreement.
The main features of Romania's current import-export regime can be summarized as follows: No quantitative restrictions on imports and exports, except for some agricultural and food products; Automatic licensing for export and import activities, with the exception of products that might affect human health and environmental protection; Gradual removal of customs surcharges on imports; Substantial reductions in tariffs on agricultural products in recent years; Customs duties and tariff systems in line with EU standards and the "Brussels Harmonized Systemn for the denomination and classification of goods; and Significant improvement in customs processing through computerization.
Many investors nevertheless still complain about complex and time-consuming customs procedures at borded5, and about the prevalence of corruption in general. Although a new anti-corruption law was passed in June 2000, careful and concerted implementation and enforcement will be required to deal with the problem and assuage investors' concerns.
Tax Policy During the past few years, the government has made substantial efforts to reduce and unify tax rates, as well as to introduce various tax incentives, with the aim of encouraging investment and improving tax collection. In 2000, a comprehensive reform of income tax was undertaken, which brought corporate taxation in Romania more in line
34 IMF Staff Country Report No. 001159, December 2000 35 Romania; Trade Policy Review, WTO, 1999; IMF Staff Country Report No. 0 111 6, January 200 1
J.E. Austin Associates, Inc. 8 Romania National Competitiveness Report with regional standards. Corporate income tax was lowered from 38% to 25% in January 2000, applicable to both Romanian incorporated companies and to foreign legal persons operating through a "permanent establishment" in Romania. According to figures compiled by the World Bank, income tax rates in neighboring countries are 35% for the Czech Republic, 18% for Hungary, 34% for Poland, 40% for Slovakia, and 25% for Slovenia.
An important provision in the income tax legislation is the 5% profit tax rate that applies to profits from export activities, provided that the profits are deposited into a Romanian bank account. A 10% profit tax is applicable if profits are used to increase shared capital.
As for personal income taxes, reforms aimed at broadening the tax base while further reducing marginal rates have been introduced. In 1992, Romania had a personal income tax schedule with 13 brackets, and marginal rates ranging from 6% to 45%. In 1993, the top marginal rate was further increased to 60%, while the number and classes of exempted taxpayers continued to grow, leaving more opportunities for tax evasion. Efforts were therefore made in 1997 and 1998 to reduce the number of brackets, and to decrease the spread between the top and bottom rates, although differential treatment of different sources of income remained. Additional reform efforts were made in 2000, including a reduction in the difference between top and bottom tax brackets through the adoption of progressive rates ranging from 18% to 40% and adoption of uniform treatment for all sources of personal income.
Various changes have also been made to VAT legislation. Effective since January 2000, the former standard rate of 22% and reduced rate of 11% have been replaced by a unified rate of 19% on all deliveries of goods, real estate transfers, and services rendered, both within the country and from abroad. VAT exemption applies to certain products, such as school uniforms and clothes for children under a year old, broadcasting rights and licenses for imported films and programs for radio and television.
Foreign Investment Restrictions Romania has tried in recent years to provide more incentives to encourage foreign investors. With the adoption of the Ordinance on Direct Investments in late 1997, foreign and domestic investors are given equal treatment in Romania. There is no limit on foreign ownership and participation in joint ventures or Romanian commercial firms. A foreign investor is allowed 100% ownership in a Romanian company. Investors may invest in any sector, with the exception of certain industrial sectors related to national defense and security that require special government approval. The recently promulgated Bank Privatization Law allows foreign participation in the banking restructuring process. However, many investors still complain about the bureaucracy at all levels which slows down the investment process and undermines the benefits that the Romanian legislation seeks to bring to foreign investors.
Romania has developed legislation for intellectual and industrial property rights protection in line with international and EU requirements; however, more effective implementation is still needed.
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Although private land ownership is allowed, availability of private land suitable for new industrial and commercial investment is limited. In addition, the procedures for land acquisition and construction permit approvals remain complicated and time-consuming.
Business Start-up Procedures Much effort has been made to streamline the business start-up process in Romania. Setting up a legal entity in Romania reportedly takes three to six weeks to comp~ete~. Under the Company Law, all new businesses must be registered with the Trade Registry, which issues a Certificate of Registration. In 1997, the Trade Registry was turned into a one-stop shop when it took charge of notary authentication and court decision processes. Under Law 13311999, the Trade Registry's responsibility is broadened to include fiscal, retirement fund, health insurance fund, and unemployment fund registrations. Once done with the registration process, the companies must register with the local tax authorities to obtain a fiscal code.
Investments that are subject to special licensing usually acquire those licenses at the time of company registration. Depending on the activity, the relevant ministries and agencies will be in charge of issuing the license. The processes vary across ministries, but overall, they are considered time-consuming and confusing by investors.
Unemployment and Labor Policy Registered unemployment reached 10.9% of the total labor force in Romania in 1994, fell to 8.8% in 1997, and has been around II % since 199837. The Romanian labor force is highly educated; but the country's declining birth rate and aging population are expected to put a further strain on its funding of pensions, social security and medical systems.
Average wages and salaries in Romania are low compared to Western European countries and to other countries in Eastern Europe. The average gross wage for Romanian employees at state-run companies or organizations was approximately US127 per month at the end of June 199938.However, salaries in private enterprises are higher, with an average gross salary exceeding US$400 per month".
Labor regulations are mostly in compliance with international practice, and investors do not view them as impediments to doing business in Romania. However, employer social contributions are considered high, which appears not only to encourage payment evasion among employers, but also to discourage employment generation4'.
3.3 Legal and Institutional Environment
Romania's transformation to a market economy since 1989 has been hampered by inconsistent macroeconomic policies. However, the threat of a prolonged crisis in 1999
36 PriceWaterhouseCoopers,Business Guide to Romania, 1999 37 EIU, IMF,PricewaterhouseCoopers 38 Pricewaterho~~eCoopers,Business Guide to Romania, 1999 39 Ibid. 40 Ibid. Employer social contributions are considered high, accounting for 45-53% of gross salary, including 30% in social security (but up to 40% in certain industries), 7% to the health fund, 5% to the unemployment fund, and 2% to the education fund.
J.E. Austin Associates, Inc. 10 Romania National Competitiveness Report forced the government to stabilize the economy through more drastic measures in its fiscal, monetary and incomes policies, as well as in privatizing existing commercial companies, and dealing with the problem of large, insolvent enterprises.
Overall, significant changes have been made in Romania's laws and legal institutions to improve its investment framework, and to unify the system with international and European standards. These include, for example, improvements in the tax, fiscal, and monetary regime, foreign direct investment policy, changes in banking legislation and the acceleration of privatization activities. These reforms have brought about a positive, yet fragile, economic recovery in Romania after three consecutive years of recession.
However, to make its business environment more favorable and attractive to both domestic and foreign investors, Romania needs to do more not only in terms of the policy framework, but also in terms of enforcing the implementation of the country's rules and regulations. Romania has faced considerable problems at the implementation level. Examples include persistent corruption, restrictive bureaucracy in landlconstruction permit procedures, cumbersome customs procedures at the borders, and poorly trained customs staff.
There is also much room for improvement in the judicial system, including 'the acceleration of judicial procedures; and better pay, training and status for employees of the judicial system in order to attract and retain highly qualified staff.
To summarize, it appears that improving the effectiveness of policy implementation in Romania requires not only adequate enabling institutions, stricter monitoring of policy implementation, and efforts to eliminate corr~~ption,but also the development of staff with high professional standards and qualifications.
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CHAPTER 4 - COMPETITIVENESS BENCHMARKING
This chapter summarizes the findings of the competitiveness benchmarking that is presented as Annex 1 of this report.
4.1 Definition
Competitiveness can be defined as sustainable increases in productivity leading to improvements in the standards of living for the average person. Benchmarking is the ability to measure one's performance relative to a particular reference group and normally relative to those who are doing the best job in a particular industry or area of endeavor. The Competitiveness Benchmarking for Romania, compiled by JAA, ranks Romania relative to the EU, EU accession countries, Southeast Europe and other countries of the world for which data are available in areas that are generally understood to be closely correlated to competitiveness.
4.2 Objectives of the Benchmarking Report
Encourages private-public dialogue Annual competitiveness benchmarking encourages reflection and discussion on issues related to the speed and effectiveness of Romania's transition to a competitive economy. Benchmarking focuses attention on strengths and weaknesses, improvement and deterioration and helps private and public leaders set priorities.
Provides objective data Effective dialogue and policy reform require the use of good data rather than anecdotal evidence and the ability to relate this data to a broader context. National dialogue is subjective when proponents of current policies present selective data, which is then interpreted as excellent performance. Critics of current policy may also present selective data and assert conclusions alleging that the situation is more difficult than is really the case. By presenting many sets of data, benchmarking provides a mosaic of Romania in which the true picture comes into sharper focus. By comparing it to the EU, EU accession countries and countries of Southeast Europe, benchmarking provides a basis for drawing reasonable conclusions.
Serves as a powerful tool to measure progress and set priorities for policy and institutional reform for governments Ireland uses an annual competitiveness report to benchmark its performance against the leading countries of the world. Not content to measure its own progress against itself, it has for a number of years restlessly compared its rate of improvement relative to the best country in the world in a given area.
Provides a rich source of data for analysis for economic faculties, business schools, technology institutes and think tanks 'Those researching IT-readiness, export performance, investment, economic results, human capacity, infrastructure and other areas will find in this data a rich source of
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information that can be used to inform their research and strengthen their ability to contribute to a national dialogue.
Finally, the publication of Competitiveness Benchmarking and its use by the economic press encourage national debate on Romania's competitiveness It is important that the average citizen understand what is at stake for Romania's future.
4.3 Methodology
Informed by competitiveness theory and by the methodologies used by the World Economic Forum (WEF), Harvard University and the Institute for Management Development (IMD) along with its own work in 100 countries over 15 years, JAA has selected 40 indicators in eight competitiveness-related categories: economic performance, exports, investment, financial sector, human resources, science/technology, infrastructure and government policy. These categories are not dissimilar to those used by the WEF and IMD, both of which are yet to provide rankings for Macedonia. 'The rar~kingsare based entirely on secondary sources and efforts were made to select the most internationally qualified source for each data set. The data were then entered into JAA databases and ranked for all countries of the world for which data was available. Data for each indicator is provided for the country along with its position relative to all other countries of the world.
For this exercise, analysis was done for Romania relative to the five countries included in the Southeast Europe Competitiveness Initiative (Romania, Bulgaria, Albania, Macedonia and Croatia), as well as the EU accession countries, and the EU itself. The following summary of the results is meant to be descriptive and is not meant to propose any particular ideology or a set of policy prescriptions. 'The authors do not intend to make judgments regarding the effectiveness or ineffectiveness of previous or current policies. Rather, the report is intended to provide good descriptive data to stimulate and encourage debate on matters important to Romania's future.
4.4 Uses and Limitations of the Study
The study reflects latest available comparative data for all countries of the world, which is usually 1998 data. Romania's situation is changing so quickly that this data may not accurately reflect the current situation. Unfortunately, while it is possible to get more recent data for Romania, this is the most recent data one can get for all countries of the world. Although there was lack of data for Romania for some indicators, all competitiveness categories are presented for reference.
Nonetheless, the study allows Romania to identify its position and its achievements relative to the world's most competitive countries, and to set goals and targets that are realistically based on the achievements of other countries over a sustained period of time. It provides an objective source of data upon which to rest analysis and conclusions. This data can be verified by going to the sources cited. It is hoped that the provision of this study will encourage productive dialogue leading to action that supports the improvement of Romania's living standards in the immediate and long-term future.
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4.5 Overview of Competitiveness Categories
Economic Performance In recent years, there was a severe economic downturn, with GDP growth reaching 7.5% in 1998. That year, only five countries had worse economic conditions. However, in relative wealth, Romania's GDP per capita in 1998, adjusted for purchasing power parity (PPP), placed the country 65'h in the world at US$5,648 per capita. This is the second highest for the five countries of Southeast Europe and compares to US$9,034 average GDP for EU accession countries and over US$21,000 for the EU itself. Economic growth in PPP terms for the period 1990-1998 was only -0.66%. In non-per-capita terms, GDP growth for 1990-1998 was an even lower -2.75%. placing Romania 165'~among 179 countries. However, Romania's income distribution, as measured by the GIN1 coefficient (in 1996), was a healthy 28.2, ranking Romania 13'h of the 96 countries examined.
Export Competitiveness In 1998, Romania's exports totaled US$9.52 billion, placing it 57thamong 140 countries of the world, more than any of the five countries of Southeast Europe. Measured per capita, though, Romania's exports amounted to US$369, still the lowest amount among the EU accession countries. Notably, growth of exports per capita of 48.3% for 1990- 1998 show that Romania is indeed progressing rapidly towards developing export sectors. This is not reflected yet in Romanian exports as a percentage of GDP, which was 26% in 1998, rankirlg Romania 8othout of 129 countries. Another indicator, tourism receipts per capita, shows that Romania is far from maximizing its potential. At US$11.55, Romania has the lowest figure amongst both Southeast European and EU accession countries.
Financial Sector The ICRG country risk rating for Romania was a low 55 in 1998, indicating a problematic financial sector. Domestic credit to the private sector, expressed as a percentage of GDP, was 24%, ranking far below average for Southeast Europe and other EU accession countries. Also, Romania's credit to the private sector in terms of GDP only reached 12.8% (114'~out of 155 countries), and M-2 as a percentage of GDP (a measure of financial depth) also just placed Romania 104'~among 146 countries. The average savings rate as a percentage of GDP for the years 1990-1998, of 19.3%, ranked Romania 47thout of 121 countries.
Investment Within investment competitiveness, two conflicting trends occur in Romania. Gross domestic investment in Romania for 1998 was only 17.7% (97th out of 132 countries) and gross domestic investment growth from 1990-1998 declined to -1 0.7%. In contrast, total foreign investment of 1998 reached US$2.03 billion, ranking Romania 33d among 162 countries. FDI per capita was US$90 for 1998, placing Romania 54'h among 162 countries. As a percentage of GDP, FDI was an impressive 5.3%, ranking Romania 25th in the world, and clearly above the average of EU accession countries for the year.
Policy Romania's policy record is mixed. Romania has reduced its budget deficit, but at 3.90%, Romania only ranks 71" out of 87 countries. Romania's extraordinarily high inflation of
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46.6% ranks it 165'~out of 171 countries, although it has recently been reduced. Trade openness, too, provided relatively low scores (82nd among 126 countries). In 1999 Transparency International ranked Romania 63a among 99 countries, indicating a perception of corruption. However, proceeds from privatization placed Romania 5'h in the world among emerging economies, the highest among Southeast European countries.
Science and Technology With 10 personal computers per 1,000 in 1998 and 9 internet hosts per 10,000 people in July 1999, Romania ranked well behind other Southeast European countries. High technology exports totaled US$117 million placing Romania 48'h in the world in 1998, but measured as a percentage of exports, high technology exports only accounted for less than 2% of total exports. Romania ranked 33a out of 88 countries with 1,387 scientists and engineers in R&D per million people and 35'h out of 78 countries with regard to expenditures in R&D. However, telecom costs are quite high, which may hinder Internet development.
Infrastructure Romania has a fairly high fixed telephone density (5Sth in the world) at 162 lines per 1,000 people as well as mobile phone density at 29 per 1,000 people (57Ih out of 118). Electricity consumption per capita, too, is at similar levels (55Ih out of 118).
Human Resources According to the UN Human Development Index ranking 174 countries, Romania ranked in the world. Labor force participation places Romania 72ndout of 177 countries. Romania's life expectancy at birth is only 69.3 years, lower than both the Southeast European average and EU accession countries average. In education, Romania has a Western literacy rate of 97.9% and enrollment levels position Romania 3oth out of 103 countries.
4.6 Summary
Romania shares some of the common institutional problems of the Southeast Europe region. While the country is ranked higher in the human resources, infrastructure and investment competitiveness indicators, it does poorly in economic performance, financial sector and policy environment rankings. Romania has a problematic financial sector and a poor record of economic growth. However, the export growth of Romania has shown some recovery over the last couple of years.
Remaining problems are related to instability and conflict in Southeast Europe, Romania's poor domestic financial sector and a policy environment hampering economic growth. In particular, the slow pace of reforms may have further limited Romania's competitiveness. Also typical for Southeast Europe, Romania's financial sector is under- developed. However, large foreign investments have shown that Romania's opportunity lies with its comparably large market, human resources and the continued development of a viable export sector. Even though the Government of Romania recognizes the importance of information technology sector, computer availability is very low in Romania.
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With a well-educated workforce and offerings through a privatization program, the country has managed to attract foreign investment amounts higher than the rest of Southeast Europe. Attracted FDI will prove beneficial in the years to come, but thus far has not had an immediate impact to counterbalance the recent recession that hit Romania. The key issues that Romania faces are microeconomic liberalization, which will open up business opportunities, and macroeconomic stabilization, which will lead to hardening of budget constraints. Romania needs to go ahead with its introduction of reforms that are necessary for a successful transition and were delayed due to slow progress of the public sector, and move quickly to address the limitations revealed in the indicators above.
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CHAPTER 5: TRADE AND INVESTMENT COMPETI'TIVENESS
5.1 Linkages between Trade, lnvestment and Growth
The relationships between exports and economic growth, investment and economic growth and the interaction between trade and investment have been among the topics most debated by economists over the last 20 years.
The World Bank argues that export success had been the centerpiece of the East Asian countries' economic success not only because exports generated income and savings and were a source of foreign exchange, but also because they contributed to technological development of many sectors and to higher productivity4'.
The Inter-American Development Bank (IDB) states that since the dynamism and composition of exports may help conditions under which firms operate and the difficulties they confront, export performance of a country is a manifestation more than a measure of competitivenes~~~.IDB1s calculations indicate that while some countries with successfi~lexport performances had more high technology content goods in their portfolios, others with similar success had abundant natural resources and more low technology content goods. Thus, one can conclude that there are many routes to success and there is no single recipe for innovation or competitiveness.
The findings of the IDB indicate that exports with a medium and high technology content do help speeding up economic growth43. The IDB also states that development of exports with high and medium technology content and possibilities for economic growth depend not so much on the absolute conditions of competitiveness as on the environment in which firms operate relative to the country's income level. Although world trade is shifting gradually from more basic goods toward new high technology goods, this trend is not a sufficient reason for countries to "choose winner products", especially for small economies forced to focus on a few products in order to penetrate world markets44. Indeed, many countries that achieved successful results did so not by "choosing winning productsw,but by spending efforts aimed at offering financial services, compensation for tax costs, and facilitating access to trade information. Small economies are at a disadvantage for fixed investments in research, development and technological adaptation needed to produce highly elaborate manufactures. 'They also lack the variety of abilities and knowledge required by more complex production processes and the economies of scale involved in marketing and international transportation.
Foreign Direct lnvestment (FDI) affects economic growth of a country through the transfer of technology, as well as through its role as a stimulus to competition, innovation, savings and capital formation in host countries. Many export-oriented activities, particularly those integrated into international production systems, are new to developing countries and involve greerrfield FDI. The studies by the United Nations Conference on Trade and Development (UNCTAD) on FDI indicate that FDI brings in
41 "The East Asian Miracle", 1993, The World Bank 42 LLC~mpetiti~ene~~:The Business of Growth", 2001, John Hopkins University Press. 43 "Competitiveness: Business of Growth", 2001, John Hopkins University Press IDB statistical calculations
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capital and financial resources, transforms and upgrades production technologies, improves capabilities of human resources, increases innovative activity, improves exports and foreign exchange earnings, increases gainful employment and shifts it toward higher-quality jobs, increases the host country's access to foreign markets and helps countries exploit existing comparative advantages and build new ones45.
While the UNCTAD cites statistical analyses that show a positive link between FDI and manufactured export performanceM, the World Trade Organization (VVTO) reports economic, institutional and legal interactions between FDI and trade. It stated that the empirical evidence points to a modestly positive relationship between FDI and home country exports and imports. The VVTO noted evidence that indicates that FDI and host country exports are complementary, but FDI and host country imports may be either substitutes or complements, depending on the details of the situation, including the policies pursued by the host country (FDI attracted by low costs of production and liberal trade regimes is likely to be complementary with imports, and vice versa for tariff- jumping FDI).
FDI and trade play a key role in firms' efforts to organize their production processes efficiently. By subdividing a production process into different phases, locating each phase in a country where it can be done efficiently, and then linking all the various phases through trade, firms can supply efliciently produced goods and services to buyers worldwide.
International trade can be a permanent source of economic growth if it functions as a channel for acquiring new knowledge and technologies and as a stimulus for continually improving productivity. It can also benefit firms that use imported capital goods, or firms that produce export goods according to international standards of technology, quality or price. Through their relations with other firms as customers, suppliers, and local competitors, firms that are not involved in international trade enjoy the continued growth generated by increasing demand of international markets, increasing global competition among firms and improving telecommunications infrastructure (all stimulated by increasing international trade).
Competitiveness is the capability to generate prosperity by producing goods and services that stand the test of the marketplace under normal conditions. In order to avoid an erosion of their competitiveness and to achieve a sustainable share in the world markets, developing countries should seek strategies that will help reposition themselves over time based on increased productivity levels and try to increase the share of high and medium technology content products in their export portfolios.
5.2 Approach
Based on the above information on trade, investment and growth, the followirlg approach is taken to assess Macedonia's trade and investment competitiveness. First, a review of Macedonia's trade performance, trade portfolio and trade partners is presented in order to provide a basic understanding of whether the country has a trade surplus or not, what
45 LLW~rldInvestment Report 2000", UNCTAD 46 Ibid.
J.E. Austin Associates, Inc. 18 Romania National Competitiveness Report it trades, and with whom it trades. The trade performance review provides a quantitative picture of a country's exports and imports. Trade performance is, in part, the result of strategic decisions of firms in a given country, which occur in the context of overall business environment incentives. Last, the trade portfolio and trade partners provide a qualitative snapshot and indicate how well diversified Macedonia's export products and markets are overall.
When a country has only a few export markets and a few products in its portfolio, its trade balance is more vulnerable to fluctuations in these markets or products. Also, the trade competitiveness of a country is correlated to the presence of high value-added products in a country's trade portfolio. As the percentage of high value-added products in a country's trade portfolio increases and productivity levels in a country rise, its exports become more competitive.
Next, an analysis of global competitiveness of Macedonia's exports by the International Trade Center (ITC) is presented, which highlights how well Macedonia's products are competing in world markets. This analysis indicates which of the country's products performed better than the world averages (increased their share), and whether the world markets for those products were in an increase or a decline.
The FDI flows in and out of Macedonia are presented to provide an understanding of the country's success and ability in attracting FDI. Finally, potential opporti~nitiesfor growth of Macedonia's exports, and what the country can do to reposition itself over time on the basis of increased productivity, are discussed.
5.3 Current Trade
Trade Performance The trade figures for Romania over the 1994-1999 period indicate an increase in trade deficit from 1994 to 1998 and a sharp decline from 1998 to 1999. Due to trade policy measures applied by the Government of Romania, imports decreased, leading to an improvement in Romania's trade balance. While the share of the private sector increased from 40.3% to 65.6% in exports between 1994 and 1999, it has increased from 39.2% to 71.9% in imports for the same period.
Table 5.1: Ex~orts.im~orts and balance of foreian trade (US$ millions)
Exports (FOB) 6151 7910 8084 8431 8302 8503 Share of Private Sector 40.3% 41.2% 51.4% 54.8% 48.9% 65.6% Imports (CIF) 7109 10278 11435 11280 11838 10395 Share of Private Sector 39.2% 45.4% 48.3% 52.4% 48.3% 71.9% Balance -958 -2368 -3351 -2849 -3536 -1892 Source: National Institute of Statistics and Economic Studies
The volume of Romanian exports increased in 1999, but at a slower pace due to the i~nfavorabletrends from the international market and a lower production level in industry and agriculture. The export volume decreased mainly with South Asia and the Russian Federation, following the financial crises that occurred in these regions, while exports
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increased significantly with the EU and CEFTA countries, mainly due to the Free Trade Agreements.
Major Products As seen in Chart 5.1, in 1999, the major exported product groups were textiles and textile articles; common metals and articles thereof; machinery, appliances and electric equipment; sound and video recorders and players; footwear, footwear articles, and their components; miscellaneous goods and products; mineral products; transport means; and chemical products.
CHART 5.1: EXPORTS OF ROMANIA in 1999
Paper and wooden products Building Materials 13% Textile 8 Textile articles etals and articles 36%
Chemical Prod foodstuff products 5%
LI Source: Romanian Foreign Trade Center
Chart 5.2 (next page) demonstrates the export and import performance of different product categories over the 1995-1999 period. Compared to 1998, while significant growth was reported in fertilizers; vegetable products; raw wood, timber, stratified products and other wooden products; nuclear reactors, boilers, machinery and mechanical devices; live animals and animal produces; and footwear, hats, urr~brellas and similar items, there was a significant fall of exports in food, tobacco and beverages;
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-- --ppp------
Chart 5.2: Exports and Imports of Romania
Imports (US$m) Exports (US$m)
VegetalProducts 'Ooo 1I(-vegetal Products I
Foodstuff,beverage & -Foodstuff, tobacco beverage & tobacco
MineralProducts MineralProducts
wTs2%B.BChemical Products -*Chemical Products
Textilesand textile Textilesand textile articles articles
Basemetals and 1000 Basemetals and articles thereof articles thereof
Machineryand mechanical appliances Vehiclesand Vehiclesand transport transport equipment 1 -11 I equipment 0 1995 1996 1997 1998 1999
Source: National Institute of Statistics and Economic Studies
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orgarlic chemicals; iron and steel products; animal or vegetable fats or oils; and cars, tractors and other vehicles in 1999.
In the first eleven months of 2000, textiles and apparel (24.4%), basic metals (15.9%), electrical machinery, appliances and equipment (13.8%), mineral products (7.9%), footwear (7.7%), wooden products (5.4%)' and chemical products (5.0%) were the major products Romania exported.
Table 5.2 (below) displays the major product categories and their share of Romania's total exports and imports in the 1997-99 period in which Romania has recorded a shrinking trade deficit overall. The only noticeable change in the composition of exports was the declining shares of foodstuffs, mineral products, metals and articles thereof and chemical products and plastics and the increasing shares of textile and leather products, as well of products from the wood and machine building industries. In terms of imports, the decreasing share of mineral products, and the increasing share of textile and leather products were the most noticeable changes.
Table 5.2: Composition of Romanian Exports and Imports (% of total) 1997 1998 1999 Exports lmports Exports Imports Exports lmports Foodstuffs 7.1 6.2 5.2 8.6 5.7 7.7 Mineral products 7.6 21.4 6.1 14.3 5.9 12.0 Chemical products & plastics 8.8 12.3 6.2 13.0 6.0 14.0 Textile and leather products 30.3 17.7 34.1 19.7 34.6 23.4 Products of wood industry 11.0 4.6 11.4 5.1 12.3 5.1 Articles of stone, gypsum, cement, 1.8 1.3 1.9 1.4 1.9 1.5 glassware and pottery Metal and articles thereof 18.5 5.9 19.1 6.7 15.4 6.6 Products of machine building industry 14.0 28.7 15.1 29.4 16.9 26.4 Total 100 loo 100 100 100 loo Source: General Directorate for Customs
Direction of Trade Romanian exports over the first 11 months of 2000 totaled US9528.73 million, about 24% higher than the same period in 1999. Five main sources for Romanian imports during this time were ltaly (22.5%), Germany (15.7%)' France (6.8%), Turkey (6.1%), and UK (5.4%). Conversely, five main destinations of Romanian exports were ltaly (18.9%), Germany (14.4%)' Russian Federation (8.6%)' France (6.2%)' and UK (4.2%). Over the last decade, the EU became Romania's main trade partner in terms of both the export and import of goods and services and inflows of foreign investment. The share of exports to EU countries in Romania's total exports increased from 24.8% in 1989 to 65.5% in 1999, and the share of imports increased from 13.1 % in 1989 to 60.4% in 1999. Table 5.3 presents the direction of Romanian exports and imports over the 1997- 99 period. While Romania's trade with EU and CEFTA increased constantly, its exports to and imports from Africa and Asia have decreased.
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Table 5.3: Direction of Romanian Exports and Imports of Romania (% of total)
- CEFTA 4.1 5.7 4.5 8.8 7.0 8.9 8.3 9.0 Africa and Middle East 11.9 . 4.6 9.2 2.2 7.6 2.0 6.8 1.6 Asia - Oceania 5.9 9.7 2.3 6.9 2.5 7.7 2.9 9.7 America 5.8 7.6 6.3 6.9 5.0 5.8 4.9 5.4 Total 100 100 100 100 100 100 100 loo Source: General Directorate for Customs Table 5.4 presents the trade flow of each the Southeast European countries with EU countries and within the Southeast Europe region. Although Romania's imports from and exports to the EU countries are the largest within SEE countries, the country has relatively little trade with the Southeast European countries. Italy, Germany and France have been the major trade partners for Romanian imports and exports in 1998.
Table 5.4: Direction of SEE Trade Flows, by Partner, 1998 (US$ million)
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Albania BiH Bulgaria Croatia FRY Macedonia Romania SEEC-7 Imports Industrial 707 1133 2418 56 16 2042 1192 7637 20630 Countries EU. Corn. 683 1048 2019 4586 1878 1089 6535 17765 Partner 1 334 Ita 372 Ger 63 1 Ger 1616 Ger 652 Ger 297 Ger 2039 Ita Partner 2 21 1 Gre 297 Ita 356 Ita 1500 Ita 588 Ita 285 Ita 2033 Ger Partner 3 68 Ger 124 Aus 289 Gre 401 Fra 228 Aus 184 Aus 810 Bra Other 25 -7 398 1030 165 102 1101 2774 Countries 1 SEEC's & 60 1096 155 959 45 0 597 174 3647 Slovenla Albania 0 1 0 5 0 3 1 B iH 0 156 1 , , 11 178 I Bulgaria 27 11 9 94 107 47 295 Croatia 7 719 5 0 65 4 80 1 FRY 1 37 0 236 5 336 Macedonia 15 1 3 8 56 126 61 354 Romania 5 15 57 15 117 7 2 10 SIovenia 6 350 18 722 113 177 46 1442 Other 97 303 1956 1324 95 275 3866 7410 Countries T~td 86d 2525 4528 7899 2587 2064 11677 31680
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Albania BiH Bulgaria Croatia FRY Macedonia Romania SEEC-7 Expo* Industrial 239 268 2304 2360 972 786 5745 10369 Countries EU Com. 226 253 1946 2024 94 1 617 5101 9161 Partner 1 150 Ita 11 l Ita 53 1 Ita 81 6 Ita 367 Ita 266 Ger 1809 Its Partner 2 33 Gre 93 Ger 443 Ger 767 Ger 335 Ger 135 Ita 1587Ger Partner 3 21 Ger 22 Aus 373 Gre 102 Fra 70Fra 44 Bel 476Fra Other 14 15 358 336 3 1 169 644 1209 Countries SEEC's & 8 195 312 1121 340 27 1 267 220 1 Slovenia Albania 2 5 6 1 13 4 25 BiH 10 654 1 14 706 Bulgaria 0 0 5 3 7 34 78 155 Croatia 1 142 7 0 5 1 15 208 FRY 0 94 0 125 117 242 -Macedonia 4 ------1 97 5 9 236 7 3 07 Romania 0 10 5 1 7 5 4 26
Other 7 "4 1448 94 1 279 135 2116 3099 Countries Total 1 254 497 4064 4421 1312 1192 8128 15803 Table 5.4 continued: Source: IMF Direction of trade Figures for regional trade of FRY are estimated using non-adjusted partner data. The total for exports from FRY does not include exports for developing countries.
Major Partners The pattern of Romania's major trade partners has changed dramatically since 1989, when the majority of Romania's trade was with the COMECON and Soviet bloc countries. Today, the countries of the European Union (EU) and the European Free Trade Association (EFTA) are Romania's most important trade partners.
Table 5.5 demonstrates that Italy, Germany, France and UK have been the most important partners in 1999, accounting for approximately 45% of both Romania's exports and imports. While Turkey was the fourth important destination for Romania's exports, the Russian Federation was the third ranking country in terms of imports. It is also important to note that South Asia is among the geographical regions that Romania imports from as demonstrated by the high volume of imports from Korea.
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1. Italy 1 1980 1 23.4 (1. Italy ( 2041 ( 19.7 I I I I I 2. Germany ( 1510 ( 17.7 12. Germany 1 1780 117.2 I I I I I 3. France 1 530 1 6.3 13. Russian Federation 1 702 1 6.8 1 I I I I I 14. Turkev 1 469 1 5.6 14. France 1 699 1 6.7 1 5. UK 413 4.9 5. LIK 440 4.2 6. Netherlands 327 3.9 6. Hungary 412 4.0 7. USA 31 7 3.7 7. USA 362 3.5 8. Hungary 27 1 3.2 8. Austria 303 2.9 9. Austria 243 2.9 9. Korea 277 2.7 10. Greece 217 2.6 10. Turkey 237 2.3 Total Exports shown above 6277 74.2 Total Imports shown above 7253 70.0 EU 5571 65.8 EU 6277 60.6 CEFTA 598 7.1 CEFTA 928 9.0 Total Exports of Romania 8461 100 Total Imports of Romania 10360 100 Source: National Institute of Statistics and Economic Studies
5.4 Global Competitiveness of Romanian Exports With industrial restructuring well under way, the competitiveness of the Romanian exports entered an upward trend due to both the structural changes and the real depreciation of the domestic currency. For example, although the manufacturing sector contracted by 8% in 1999 versus 1998, the share of exports of manufactured goods in total exports increased from 30.7% in 1998 to 35.1% in 1999, while the annual growth rate of exports increased by 5.9%.
In order to understand the competitiveness of Romanian exports, it is important to benchmark the export performance, to identify new markets and to monitor the role of competitors. The Trade Performance Index (TPI), developed by the International Trade Center (ITC), assesses the multifaceted dimensions of export performance and the competitiveness of countries as well as their principal exports sectors. Using the COMTRADE database of the UN Statistics Division and covering 184 countries, TPI calculates two composite rankings, one for the overall position of the country and the sector under review, and another for the change in performance from the prior ranking. Thus, 'TPI allows comparison of the performance of a country's export sector with that of other countries as well as with the performance of other sectors of the same country, shedding light on both the competitive and the comparative advantages.
As seen in Chart 5.3 (below), Romania ranked between Ilth and 84th for the export sectors under review. Non-electrical machinery, electronic components, leather products, clothing, transport equipment and processed food exports ranked Romania within the top 40 in the world. In terms of change in performance, basic manufacturing, non-electrical machinery, clothing, consumer electronics, electrorric components, and petroleum products were among sectors ranked among %thetop 40.
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Chart 5.3: Trade Performance Index for Romania
Posltion Ranking
4 4 H Change In Performance Ranking 16
28 30 3 1
------
The International Trade Center has developed a number of tools to provide a country's export portfolio in terms of the dynamics of national supply and international demand. Chart 5.4 presents the performance of Romania's top 20 leading export product groups. It displays the export value of the products, and compares national export growth with the growth of the international demand. Chart 5.4 also indicates the average nominal growth of total exports of Romania (0.5% per annum indicated by the vertical line) for the period 1994 to 1998 and the average nominal growth of world imports over the same period (5.8% per annum indicated by the horizontal line). The diagonal line (the line of world constant market share) divides the chart into two parts: exports of products to the right of this line have increased their share in the world market, while the ones to the left have experienced an erosion of their world market share. The small number of large bubbles such as wooden furniture for other use, preparation of non-crude petroleum oils and oils obtained from bituminous minerals, and footwear (parts of footwear uppers), indicate that Romania's exports are not particularly concentrated.
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Men'slboys' trousers, overalls and shorts; sweaters, sweatshirts, waistcoats (knitted); ignition wiring sets, others used for vehicles, aircraft and ships; and line pipe (used for oil and gas pipelines) are some of the export products in which Romania has performed very well. These were dynamic products, which grew faster than the world trade in general, and for which Romania has been able to outperform world market growth and increase its share of world imports. Exporters of these products have proven their international competitiveness over the 1994-1998 period.
Lumber (beech), wooden furniture for other use, and Portland cement are sectors that represent challenges for Romania. While the international demand has been growing at above-average rates, Romania's exports of these products have either been falling behind or grown less dynamically than the world trade, causing Romania to lose its international market share. With these products, the bottleneck is on the supply side rather than the demand side. Therefore, it is essential for Romania to remove the barriers that impede a more dynamic expansion of these exports.
Romania's share in the world import markets in cargo vessels; other sports footwear; parts of footwear - uppers; lumber (coniferous wood); women's1gi1-Is'blouses, shirts and shirt blouses; women'slgirls' jackets, blazers; men'slboys' shirts (woven) and boots (plastic soles - leather uppers) has grown between 1994 and 1998, even though these markets were declining or growing at a below average rate worldwide during the same period. From a strategic perspective, Romania needs to identify and target niche markets that will generate positive trade performance.
Romania does not have any sizable export categories that fall under the "losers in declining markets" category47with the exception of unwrought aluminum, which is almost on the "diagonal of constant world market share".
Table 5.6 presents the exports of Romania's 30 product categories at the HS 6-digit level in 1998. While the "Trend 94-98" column shows the annual percentage growth of the export value, the "Volume Trendn column shows the annual percentage growth of quantity of the product. The "World Trendn column indicates annual percentage growth of world irrlports of the product under review in the period of 1994-98. Looking at the values under this column, one can argue that many of the Romanian exports are not among the products in the world that experience higher growth. The table also indicates #thatRomania's market share in these products is between 0.2% and 10.1%. Products with a "Unit Valuen above 1 suggest that the products are positioned in a market segment characterized by above-average quality and prices. 'The "No." column indicates the number of countries importing the product under review from Romania.
" World imports of these products have either increased at a below average rate or actually declined, thus the export prospects for these products tend to be bleak.
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Table 5.6: World Imports from Romania Product Rank SlTC Value Trend Trend Volume World Market Unit . Leading Markets value category 1998 94-98 stability trend trend share value NO. 1st- 2nd- - 3rd- - I I , I I I I I - I 1 / I i !AMwds {mbr sat I 82831 71 Med j 391 61 0.21 n.al . 1 1 I All goods (IMF) 8128 n a ' ---- %' . 151~~~~iftowe~-~~ebor i;rtnoWerr'oiteiiide " ' ' - 25 &:Itg ;+ued, ,134 0 353 t.0: 19; pa ~a:TQR 16 252329 Portland Cement, other than wh~tecement 82 8 Med 38 9 36 0 9 24 EGY AUT HUN PmpwrrBafi &~on.crtdepetmButum ails and ail 1 1 , -11. ~~2~100~~~~,froin'b~ffminousminetals , 3631 311 ' 1 -' Q 0 ' 0~71 7-2159 (GEU,(UM( TVR I 30 390410(~ol~v1n~lChloride(PVC)- Not Mlxed 50) -11 Hlgh 1 531 21 13 08 16 ITA GBR GRC.
r (thicknes~>~mmbCO~WS WOO^ ,, 154 22 nigh I 0.4 0.9 49 LBN SAU I 12 440792 Lumber (thckness>6rnm)- Beech 87 6 Low 13 17 102 1040 EGY SYR DEU Sweaters, sweatshhts & watstcoipft,- knme#l- '17 6tl03C men-anedeares 81 18 Hi 23 11 1.4 0.8 26 DEU FRA fTA I I l~ensl~ovsanoraks. skilwind iackets & similar I I I I 11 IIIII 26 620193/arl - woven- man-made-fibre * 58 Hlgh 25 8 20 141 15 ITA I DEU ( POL , 37" c h ? A, I ) -oyetsris &Ishartg:~#wp!pf.. . ,<- < ; ."$ '< * < . Q:',' ,- ', 36 0.8 ,, ., . a La!' <./iWh': . , 04lf;; &U 1 ~PA~J*~EL I 1 l~ensl~rousersoveralls &shorts -woven 1 1 1 I I IIIIII 20 620342 cotton 76 21 Hlgh 19 8 08 1.2 22 DEU ITA GBR uz , - k&B/86y$ I~~u&W,;OV~I~~&S~DI~SWoven .~ " , - 18 3~~3sy~iheti~;~l,te " , $9:"' 9 83 7.2 28 CtEU ETA GBR WomenslG~rlsjackets & blazers - woven - 22 620433 synthet~cfibres 1 72 17 Hlgh 19 18 5.7 0 9 18 DEU 1 GBR ITA ! W~nslO&jaJ@fsts& trrkyys $4 <'-erz0939;m \(. (i I I JWomenslGirlstrousers, overalls 8 shorts - I I I 1 I I /Ill 271 620462 woven - cotton 1 561 70 H~gh 51 14 18 1 DEU ITA 1 GBR ,A -< ~:~MB~~"t~tx~Ik9r*8 ii i,*< ')* 2 v e & ;; ~~~~1S,wVm&w~~B~~~8 10 620520 MenslBoys shds- woven cotton 1.1 16 DEU ITA - ----~----;.m-" FRA ;-:-@ bkx&s,-rb]#us~~+;~ ', 14 x-~IWVBtl~<~~~~8ds:Bbr8~ .A v'p .- ' O$td$'DEu ( @BR I I lother sas footweares- rubber1 olastic soles 1 1 1 1 I 1 IIIII 19 6403191- leathe; uppers 771 71 LOW 13 -1 I.Q o 91 17 ( ITA NLD DEU ):~~f:~~&[,~n~,~'~3. 1.5~'*0.g/2~~1'1~?~~~i.~ 1 M06101~afis- -- - of footwear- uppers (excluding stiffeners) -2151 - 161 Hioh I 191 01 8.81 1-11 14 I ITA / DEU I FRA I 241 7204491~emuswaste &sxap-lron or steel nes 1 691 I 1 -31 1.41 1.01 15 1 ITA 1 TUR 1 BGR I I I~latrolled ~r~d,i/nas, in coils, hr >I=600mm I I I I I IIIlII
I I l~latrolled orod. ilnas. not in coils. hr. 111 I I I IIiII
FsTgasl~nes, mn (excl 13 730410cast 1ron)l steel seamless 86 50 H~gh 134 12 2 9 0 7 38 USA KVVT ITA
11 13 1.1 12-- 3 DEU AUT-- ITA 93 1 6,13 1.4 15 -NU~,~U,-GYP 2 940360 Wooden furniture for other use 306 -1 Low 6 8 2.51 0.6 57 DEU FRA NLD
(~rensportI service, media 504 6 Med 4 0.21 I I
Source: ITC
Notes on Table 5.6: 1. Values are in US$ million. 2. Trend and growth are expressed in percentage per annum. 3. Market share is expressed in percentage. 4. Unit Value - The relative average unit value serves as an indicator for the positioning of products. Values above (below) 1 suggest that the products are positioned in a market segment characterized by above-average (below-average) quality and prices.
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As seen in Table 5.6a1 labor-intensive industries have been the driving force behind Romania's exports between 1994 and 1998. Labor-intensive products were the leading category in terms of exports value and growth and had the largest share of Romania's total exports. Although they recorded a significant growth rate of 10%' the natural resource intensive manufactures did not comprise a large share of the country's total exports. Human capital intensive manufactures of Romania comprise the second significant group of products with a 19% share of the total exports. The technology intensive manufactures did not record much growth although they comprise 15% of the country's total exports.
Table 5.6a: Indicators on Ex~ortPerformance Group of Products Value 1998 Growth 94-98 Share in exports Primary products 1269 0 15 Natural resource intensive manufactures 533 10 6 l~aborintensive manufactures 1 3614 1 12 1 44 I Technology intensive manufactures 1246 1 15 Human capital intensive manufactures 1539 7 19 Source: ITC
Certain factors helped enhancement of Romanian foreign trade over the last decade. These include foreign factors such as the extension of the MFN clause by the USA on a permanent basis, the extension of preferential trade regime status granted to Romania by the Russian Federation, Belarus and Kazakhstan, the enforcement of agreements concluded within WTO, the enforcement of agreements concluded by Romania as part of European Economic integration (Association agreements with EU, Free Trade Agreement with EFTA countries, CEFTA agreement, and Free Trade Agreements with Moldova and Turkey), and domestic factors such as ongoing restructuring and privatization of the national economy, export and import liberalization, establishment of exports and export production promotion and stimulation systems.
5.5 Current FDI Flows
Investment related to privatization has been a dominant form ,of inflows for a number of countries in the Central and Eastern Europe, including Romania. As Table 5.7 presents, Romania has capitalized on privatization-related investment in 1997 and 1998, which accounted for about 60% of the FDI increase experienced in Romania those years.
Source: World Investment Report 2000
During the period 1990-May 2000, foreign direct investment in Romania showed a high concentration in Bucharest (about 51.3% of the total foreign capital invested and about 53.5% of the total number of companies with foreign participation established). The FDI to Romania is generally known to concentrate on three geographic locations: Bucharest,
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Dolj and Tmis. Investments to Moldova and southern counties are known to be sigrlificantly low, mainly due to lack of infrastructure.
FDI is concentrated in Romania in the following sectors: Industry (mining, processing, machine building, tools and equipment) - 25.9%; Professional services - 20.6%; Wholesale trade - 14.5%; Food industry - 13.0%; Light industry - 10.8%; Retail trade - 7.8%; Agriculture - 2.7%; Transportation - 2.0%; Construction - 1.9%; and Tourism - 0.8%.
Over the last decade, the EU countries were the source for 56.6% of the total FDI attracted by Romania. Table 5.8 presents the cumulative amount of FDI by top 10 countries from 1993 to June 1999. The Netherlands, Germany and Italy have been the largest investors in Romania.
Netherlands 540.51 Germany 376.27 Italy 292.20 France 273.62 USA 242.37 - -- ~outh~orea 234.00 UK 183.06 Turkey 176.88 Austria 174.13 l~otalof countries above 2631.101 Sources: The Chamber of Commerce and Industry of Romania and Bucharest Municipality Commerce National Register Office
The FDI per capita figures for 1998 indicate that Romania ranked second among the Southeast European countries; however, the country ranks eighth when compared to the EU accession countries.
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Table 5.9: FDI inflows of Selected Countries I. 11 I FDI per Capita (US$) 1 Total FDI hillion) ion) 1)
Czech Republic 248 2,554 Hungy ar 191 1,936
Latvia 146 357 Slovak Republic 104 562 Slovenia 83 165
Turkey 15 940 EU Accession Average 149.25 1404.58 Croatia 194 873 Romania 90 2,031 Macedonia, FY R 59 118 Bulgaria 49 40 1 Albania 13 45
, 693.60 , , SE Europ e , , Avera, g e , , , 8 I.OO Source: The World Bank
During the period 1990-2000 (August), foreign direct investments in Romania reached the level of US$4.89 billion, with an additional US$1.I2 billion being effectively invested in the privatization process.
What Romania offered to investors during 1992-1996 was less attractive than the Central European countries (Poland, Hungary, Czech Republic), which benefited from privatization of large companies (such as ~kodain the Czech Republic), and some public utilities (such as telecommunication and electricity networks), airline companies or state banks. During this period, foreign direct investments due to privatization totaled an insignificant amount of US$33.1 million. Most of the foreign investment was by a large number of small foreign enterprises and a few large multinational firms. When Romania began broadening its privatization offer after 1997, the timing was too late as it was adversely affected by negative international circumstances (like the war situation in Yugoslavia), and undermined internally by legislative, institutional and occasional political instability. However, over the 1997-2000 period the legal and institutional framework for investment became extremely volatile and even unpredictable while the privatization offerings became more attractive. The volatility of the legal and institutional framework strongly affected foreign investors directly by discouraging investment initiatives due to the difficulties of preparing and implementing business plans during this period. The negative evolution of the business climate and the decline of the economy overall were factors that also indirectly impacted investment decisions. Thus between 1999 and 2000, the country recorded its lowest annual amount of FDI over the 1991- 2000 period.
48 This includes all of the countries above plus Romania and Bulgaria.
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5.6 Competitiveness of the Romanian FDI Environment
Since 1990, Romania's stated policy has been encouraging foreign investment. Even though there is some resistance to, and skepticism about, the benefits of foreign investment by certain political sections and managers of state-owned enterprises who fear that foreigners' purchases of state-owned companies at very low prices will give them too much influence in the economy, the concern of the government has been on how to attract foreign investment to Romania.
As of December 1999, the level of foreign direct investment stock in Romania was definitely much lower than in some other countries in Central and Eastern Europe (Poland - US$30 billion; Hungary - US$19 billion; Czech Republic - US$16 billion). Foreign direct investments to joint ventures and greenfield investments were characterized by a sinuous evolution, with a clear downward trend during the past four years. During the first eight months of 2000, a historically low level of foreign direct investments had been achieved (a little over US$3 million per month, which is much less than 1991 levels).
A significant impediment that hampers the ability of Romania to attract FDI is the country's unpredictable legal and regulatory system. The tax laws are constantly changing and unevenly enforced. Tort cases can require lengthy, expensive procedures and judges' rulings face uncertain enforcement. Other factors are an unevenly developed infrastructure, lack of proper market institutions (especially in the banking sector), legal and institutional instabilities, and a slow privatization process. However, the incoming waves of FDI in Romania may partially be explained by the election cycles, particularly in the 1992-1 996 and 1997-2000 periods.
5.7 Opportunities
'The industrial sectors and products with high export potential in Romania include textile and garments; machine-building; electronic and electrotechnic products; wooden products and furniture; chemical and petro-chemical products; metallurgical products; leather products; construction materials; and food industry and agricultural products.
The textile, garments and leather sectors have improved their efficiency in recent years, mainly by gradually shifting from low-cost, low-quality production towards low-cost, high- quality branded goods for export to western European markets. Despite these achievements, a large volume of Romanian exports in clothing depends on imported textiles and often takes place on the basis of outward processing arrangements. Food industry and production of electronic consumer goods (radios, Nsand communications equipment) are fields that attract considerable foreign investment and are among the sectors in which Romania can secure a more competitive position in the world markets. However, in order to achieve this goal, the country must overcome hurdles such as incomplete privatization process, increasing costs of energy and poor quality of domestic inputs.
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The Government of Romania should assume a key role in supporting Romanian products' access to foreign markets by encouraging increased competitiveness. Trade policy measures will have to shift their focus towards improving competitiveness and facilitating the access of Romanian-made products to foreign markets, even though they require a more drastic reduction in protection at the border.
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CHAPTER 6 - INDUSTRY AND FIRM-LEVEL COMPETITIVENESS
6.1 Introduction
This chapter presents analyses of four industries, namely, Apparel, Information Technology (IT), Tourism, and Wood and Furniture, *from a competitiveness point of view. The three tools used in the analyses are described below:
Diamond Analysis The industry analyses below utilize the competitiveness diamond, developed by Michael Porter, which helps explain the decision making process for firms in a particular industry in a given country. The four sections of the diamond are factor conditions, demand conditions, related and supporting businesses, and firm strategy, structure, and rivalry. Factor conditions refer to the presence of basic and advanced factors such as labor, technical infrastructure, and other factors related to productivity. Factor conditions are analyzed on how well the country has upgraded its natural conditions. Demand conditions reflect the level of sophistication of the local customer base, which would ideally be anticipating global trends and preparing local manufacturers for future upgrades. Related and s~~pportingbusinesses are the local suppliers and distributors who can serve as catalysts for innovation, reinforce skills in product manufacture, process technologies and market channels. Finally, strategy, structure, and rivalry describe firms' choices and positioning, and the presence of local competition. Some innovation-driven economies present a very high degree of rivalry. Generally, strong local competition is a positive preparation for firms in the global marketplace.
SWOT Analysis SWOT analysis refers to Strengths, Weaknesses, Opportunities, and Threats and helps firms assess the business environment they operate in from a strategic perspective. Strengths look at the advantages enjoyed by an industry. Weaknesses cover the points that should be avoided, disadvantages, and poor characteristics of a particular sector. Opportunities represent changes in market trends, potential technical innovations, government policies and demand trends that may positively affect the industry in question. Finally, threats cover the rivals' strategies, threatening trends in technology, potential cash-flow problems, and changes in the products and job specifications that may negatively impact the firm.
Fairbanks-7 Opportunities Analysis In his book, Plowing the Sea, Michael Fairbanks identifies seven patterns of uncompetitive behavior commonly present in developing countries. The first pattern is an over-reliance on basic factors of advantage, which causes an export of natural resources at devalued exchange rates, a depletion of the exported products, and the pressures to keep costs low. The remedy for this pattern is to develop more complex sources of advantage. The second damqging pattern is a poor understanding of customers. Private sectors in most developing countries do not make explicit choices about customer segments, do not understand different customer needs, and do not seek out the most attractive customers. Industries must invest in customer research to become competitive. The third pattern is ignorance of relative competitive position. This pattern reflects a tendency to make uninformed choices, to pursue a habit of ineffective communication, and a high degree of vulnerability to competition. In order to correct this
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pattern, businesses in developing countries must research their relative competitive position. A fourth pattern is that of a failure to forward integrate. Postponing critical decisions on strategic issues, companies cede control of their future. Studying these opportunities is crucial for enhancing the relative competitive position. Poor inter-firm cooperation is the fifth damaging pattern. Firm behavior is strongly affected by the rivals. Cooperation can substantially raise firm productivity levels. Defensiveness forces companies to arrive at illogical conclusions, avoid competitive solutions, and engage in backward behaviors. Finally, the seventh pattern is excessive paternalism. Heavy control of key sectors of the economy prevents innovation and needs to be eliminated.
6.2 Apparel
A. Industry Definition For the purposes of this analysis, the apparel industry is defined as the assembly of articles of apparel and clothing accessories (knitted, non-knitted, crocheted or non- crocheted), and the main product groups include suits and sets, jackets, trousers, skirts, shirts and blouses, overcoats and similar items.
B. Industry Background and Performance The Romanian apparel industry went through a restructuring period during the first years of economic transition in Romania. Large enterprises split up into smaller private companies, and an important number of private firms emerged. Thus, apparel production started picking up in 1995, and employment in this sector increased. The job creation was due to the fact that the emerging SMEs had more openings than the job terminations by large enterprises. Productivity levels in apparel sector also increased as small apparel manufacturers had better success in adapting to market demand, and they had relatively low entry barriers, i.e., less capital intensive nature of the business, and possibility of sub-contracting work. At present, most of apparel exports are made under OPT^^ contracts, mainly for clients from Germany, Italy and to a lesser extent, France.
The apparel industry is the leading exporting sector in Romania. Exports of apparel represented over 23% of total exports in 2000. This ranking is closely linked to the existing OPT agreements, through which the Romanian clothing factories sub-contract with foreign companies. During the last ten years there has been a dramatic decline in the productivity levels of sectors that the apparel sector depends on for raw materials (flax, hemp, wool and other textiles).
C. Diamond Analysis
Factor Conditions The Romanian apparel sector enjoys a skilled and relatively cheap labor force. In 1998, there were 245,000 employees in the apparel sector, or 10.8% of the total number of employees in manufacturing. The sector employs textile-engineering graduates from the University in Lasi, as well as graduates with design specializations from the Fine Arts Faculties throughout the country. There is a Fashion Institute in Bucharest and a number of fashion fairs take place throughout the year. There are also many high schools throughout the country offering vocational training for workers in the apparel sector.
49 OPT -outwards processing trade, or contract work (in Romanian "lohn")
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ROMANIAN APPAREL INDUSTRY DIAMOND
lete but improving
- Reliance on contract work (90% of location for access to EU market +I- Poor but improving quality of domestically purchased inputs - Lack of financing
+I- Domestic demand is becoming more sophisticated +I- High foreign demand, mostly for contract work - Low brand loyalty + Emerging association and - High price sensitivity
+I- Emerging domestic design - Upstream sectors in need of deep restructuring (textiles, accessories, equipment)
- - --
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Romania's geographical proxirr~ityto the EU market plays an important role in European companies' decision to contract work as there are savings in transportation costs and in time. The physical infrastructure in Romania is rather satisfactory, with a good network of roads, most of them repaired in recent years.
The quality of raw material for apparel assembly, such as fabric, accessories, and packaging that is available domestically, suffers from low quality. However, over the course of the last five years, the quality of local products has been going up.
The same is true for the machinery being used by many apparel contractors. Their machinery is obsolete, although recently the ready-to-wear businesses have been investing in modem equipment.
A problem facing the sector is difficult access to financing. Due to low financial market sophistication, most financing is available in the form of bank credits, which have been subject to high interest rates due to high inflation. Financing of start-up companies is mostly by entrepreneurs' own personal financial resources. Lack of financing coupled with lack of knowledge of foreign markets have been the main forces pushing the apparel assembly businesses to contracting with European firms, thus causing the boom in OPT exports. Roughly 90% of exports materialize due to OPT arrangements.
Demand Conditions The main export destination for Romanian apparel exports is the European Union. The EU's imports of clothing and clothing accessories (SITC code: 84) have increased constantly during 1990-1998, from ECU 21290 million in 1990 to ECU 40766 million in 1998, whilst its imports from Romania increased during the same period from ECU 344 million to ECU 1865 million. This shows that while EU imports nearly doubled within the period, its imports from Romania increased more than five times in the same period, and Romania's market share increased from 1.62% to 4.57%.
Domestic demand is not so sophisticated and very price conscious. There is not much brand loyalty among the domestic consumers. 'The highest demand and the highest degree of competition are observed in the Bucharest market, where the purchasing power is higher than in other locations. In addition, quality awareness of the local demand is notably increasing.
Strategy, Structure and Rivalrv The number of firms in the apparel sector grew exponentially due to the fast privatization and the industry is entirely privately held. Concentration indexes in the industry are very low, indicating a very competitive market (Table 6.1). There are many big firms whose businesses depend on contract work for countries like Germany and Italy.
Table 6.1: The number of enterprises in the apparel industry in 1998 Of which: Sector Total >50 employees <50 employees Manufacturing of textile articles (except 712 41 67 1 clothing and lingerie) Manufacturina of other textile articles 356 49 307 I Clothing (apparel) industry 1 4661 1 648 ( 4013 Source: Romanian Statistical Yearbook 1999
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Although the domestic market is more profitable for apparel manufacturers, it is also very competitive and is negatively impacted by imports and decreasing purchasing power of consumers. Apparel manufacturers tend to target the domestic market in order to establish good distribution networks and to create their own chain of retail shops since the retailers in Romania tend to squeeze 'the profit margins of the manufacturers.
Although the domestic market is a very corr~petitiveone, the profit margins are higher than those offered by OPT exports. The entry barriers to apparel sector are low, and many apparel firms are now strengthening their brand identity on the domestic market, but products are still not very differentiated. Most manufacturers do not gather sufficient information about current and potential buyers of their products, and they often do not effectively follow the fluctuations in customer needs and tastes.
A number of domestic designers have emerged recently, selling their own lines of apparel. The most important manufacturer-retailer on the domestic market is Steillman, but there are also young designers with a network of shops in many cities, such as Tina R., Janine, etc.
Related and Supportina Industries Supporting industries are in a weak condition. Thus, while the apparel sector has flourished, the textiles sector has been dramatically affected by lack of finance and by price competition from imports. The production of raw materials (wool, flax) has dropped. The quality of Romanian raw materials is low and inconsistent, with variances from one batch to another. The local accessories for apparel fall short of meeting the demand of the apparel sector, thus requiring importation of accessories and increasing the final cost of production. Since there are no local manufacturers of machinery that would be sought by apparel businesses, most of the equipment used by the apparel sector is imported.
There are signs of cooperation between the apparel sector and its support sectors, and there is some degree of association-building in the apparel sector.
D. Role of Government
The Ministry of Industry and Trade has started a project called "Strengthening Romania's Export Capacityn, financed by the UNDP and the Swiss government, aimed at granting assistance for the development of exports and diversification of export markets for the textiles and apparel industry. The program aims at increasing the design capacity at the SME level, diversifying the product range and penetrating new markets.
The government could give more support to the apparel sector through focusing on providing an environment that enhances apparel businesses' access to financing. Among things that the government could do is carrying out a better dialogue with the apparel businesses and trying to respond to their needs in creating a competitive business environment.
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E. SWOT Analysis Table
Strengths Weaknesses - Cheap, skilled labor - High dependence on OPT exports - proximity and strong exports to EU - Weak supporting sectors market - Lack of strong brands - Sizable domestic market - Lack of knowledge about export markets - Lack of financing - Weak management and marketing skills - Obsolete and worn out equipment
I Threats O~~ortunities I - Shift of OPT production to other I - Development of domestic brands countries - Export of products with higher value- - Over-reliance on low-income market added content segment - Restructuring of supporting sectors - Insufficient product differentiation - Focus on cost-based and labor intensive processes
F. Fairbanks-7 Opportunities
Opportunity Category ] Potential Opportunity ] Suggested Action 1. Improve customer The industry could benefit Companies should collect understanding from better knowledge of information on their client market segments and their base, and their clients' requirements. needslrequirements.Adapt production to meet customer demand.
Many apparel integration sector may identify new manufacturers operating business opportunities and on the domestic market better profit margins by under their own brands forward integrating their have integrated forward businesses. towards retailing. A backwards integration towards textile manufacturers might also benefit the apparel companies in the long run, reducing dependence on imports of supplies.
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Potential Opportunity 1 Suggested Action New business opporturrities Companies should spend may arise as a result of more on research and being innovative and development to create creating new designs, brand their own designs and names, etc. come up with innovative concepts.
4. Cooperate with cluster There are definite synergies Joint production of large that all firms can capitalize orders, joint marketing on on if the textile, apparel, foreign markets, accessories, packaging and dissemination of logistics firms can join efforts information, cooperation and learn how to cooperate with designers - these as a cluster. should be the directions of collaboration within the cluster.
5. Understand Companies have a better Companies should analyze competitive position chance of being competitive their competitive positions. by understanding their They should assess their positions with respect to their customers' needs, prepare competition. They can then strategic plans to beat their come up with better competition and try to business strategies and occupy niches in the target improve their positions. markets.
6. Avoid over-reliance on Over-reliance on basic Apparel businesses should basic factors factors such as cheap labor increase their market and OPT contracts may share of products sold result in loss of under their own brand and competitiveness. More reduce their contract work. competitive f rms focus They should also develop efforts on figuring out ways strategies that depend on to integrate advanced factors advanced factors. into their corporate strategies.
7. Avoid government Too much governmental So far the apparel sector is paternalism protection and not one of the sectors that defensiveness result in loss receive paternalism from of corrrpetitiveness of the government. The sectors, and the loss of government should many business cooperate with the private opportunities. sector to increase exports.
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G. Looking Ahead
The apparel industry remains as a sector with high potential within the Romanian economy. However, it needs to improve some aspects of its competitiveness in order to enjoy this potential. The apparel companies sho~~ldnot base their strategies on relatively cheap labor rates but focus on increasing their value-added production, especially through upgrading their export markets and creating Romanian brand names. Romania also needs to develop its textile industry (production of yarns, fabrics), and strengthen its emerging SMEs to increase its competitiveness in the apparel sector.
The Romanian government could focus on improving the economic environment in which firms operate, reduce the red tape in the country, elirr~inatecorruption and help improve firms' access to affordable financing. The private sector, on the other hand, could form associations, where manufacturers could pool together their resources and gain better access to and information about markets. Cooperation and coordination among cluster members would also allow for the achievement of synergies. The future performance of the sector will also be linked to the ability of the government to provide facilitating conditions for business in general. This may involve enforcement of legal standards, reduction of the administrative barriers, provision of incubatory services for start-up firms, improved management skills through education, and attraction of foreign direct investment.
6.3 Information Technology (IT)
A. Industry Definition
IT industry involves companies supplying technology, equipment, products and services, i.e. both hardware and software. Although in recent years there was a convergence between IT and communications (e.g. internet technology, WAP, extranet networks, etc.), this analysis limits the definition of IT to two main branches: Computers and ofice applications and Informatics and related activities.
6. Industry Background and Performance
The beginning of IT industry in Romania dates back to the 1960s with manufacturing of Felix computers, of French origin, on setting up profile higher education, territorial IT centers and IT centers of big enterprises. The territorial IT centers served the IT requirements of local state enterprises and the local authorities, while the branch IT centers were assigned to ministries for 'their requirements. The ministries usually had under their control the IT centers set up within major state enterprises. Due to bad management of the hardware and software resources, the lack of communication between scientific circles and bad management of human resources, the activities of these centers lost their importance and efficiency.
Although the IT sector in Romania currently accounts for 0.5% of GDP, and just over 1% in total exports in 2000, it is experiencing a high growth rate. The service and software segment is growing at 30% annually, while the rest of the IT industry is growing at 10.9% per year. The number of IT specialists is estimated to be around 25,000, of which around
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10,000 are in software development. The total market size in 1999 was around US$227 million. Exports in 2000 were around US$132 million, with most of the products classified in NACE 30 (where exports have grown dramatically in the 1999-2000 period).
Romania is increasingly becoming a destination for companies seeking to outsource programming, due to the fact that it offers skilled employees at low wages, a high quality educational system capable of graduating engineers, a good communications infrastructure and a good knowledge of English or French languages. Most of the software written in Romania is applications software or real time software (including developing applications, network services and lnternet services). These applications have a wide demand and a developed market in Romania. The Romanian IT sector is less involved in writing basic software, which mostly comes through contracts from well- known foreign firms. There are no hardware manufacturers in Romania, and all components are imported and assembled in Romania.
During the last few years, telecommunications and lnternet services experienced strong development. Romania witnessed an impressive growth in the number of lnternet hosts and lnternet connectivity, although lnternet access is still relatively lowm. The country also experienced a growth rate in mobile phone services, which was higher than the regional average. Romania has a high basic telephone penetration in urban areas and soon-to-come competition in this market will improve this measure, raising the quality of services and lowering the prices. However, in order to be able to offer high-speed data transmission services, sizable infrastructure investments are needed.
C. Diamond Analysis
Factor Conditions Romania has an important number of IT specialists with various skills, mostly in application development, nearly in every field, from design and architecture to integrated circuits. 'The IT specialists also have solid knowledge of hardware and networks. Some estimates consider there are about 25,000 IT specialists, in a population of fewer than 23 million people. Much of the qualified workers are graduates from the technical institutes in Bucharest, Cluj, lasi and Timisoara and are mainly based in these and some other cities (Brasov, Targu Mures, Constanta, Craiova, Ploiesti), employed by research institutes and IT centers. Bucharest hosts about 70% of both qualified labor and IT firms, or 90% including the main university centers mentioned above. Most of the other cities above have their own universities and are also important industrial centers.
There are an estimated 3000 IT companies in Romania, employing around 100,000 people. According to statistics published in 1996 by a prestigious French IT magazine, Romania had over 25,000 IT specialists, meaning that it had 109 IT specialists per 100,000 residents, compared to only 24 in India, which is a major software exporter. However, there is a recent trend of emigration to countries with higher standards of living among the highly talented IT specialists.
Software product circulation is highly dependent on the quality of telecommunication infrastructure. At present, the Romanian telecommunication networks cannot meet the
The data is ambiguous, as some sources quote 76,000 Internet subscribers, and others fiom 150,000 to 300,000 as of the year 2000.
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Romania has passed several laws affecting the IT industry: the intellectual property rights law, law on e-commerce, law on granting of incentives for knowledge parks, etc. Romania has also developed a national strategy towards supporting its software sector. However, much is still to be done. Specific areas needing attention are issues associated with e-commerce and e-business such as electronic signatures, privacy, security, fraud, consumer protection, etc.
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ROMANIAN IT INDUSTRY DIAMOND
+ Trained engineers +/- Poor but improving Internet use + Language skills good (EnglishiFrench) + Export oriented industry + Good universities - Independent domestic software - High emigration of IT companies are dependent on a specialists narrow client portfolio - Insufficient computer + High percentage of IT companies ubiquity have foreign capital - Telecommunication
- Weak local demand
cooperation
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Demand Conditions There is a huge untapped domestic market demand, but the current demand in Romania for IT products and services is low. According to official figures, the requirement for public procurement exceeds US$5 billion for the next 5-6 years, to which other US$ billions of demand from the private sector could be added. More realistically, a figure of US$2 billion of domestic demand could be estimated. 'The potential demand of the local authorities for information systems to manage their databases alone represents a possibility for growth of the domestic demand. There is also the need to adapt software for the local market.
The main domestic market for Romanian IT businesses is the applications market, especially banking applications, but even there competition from foreign firms is severe. The buyers in Romania do not yet have the understanding of the products to base their purchasing decisions on the quality of the products, and they are unable to assess their real needs. The management systems market is a dynamic one, quantitatively controlled by Romanian businesses.
Lately, more and more software companies from developed countries have been approaching Romanian firms5' for software development because of low labor costs and because the cost of know-how and technology transfer is low. The foreign firms are deemed as very demanding by Romanian IT businesses. Many foreign firms, mostly from France, Germany and the USA, have set up their own representative offices in Romania for software development.
Strateav, Structure and Rivalry Following the fall of the Iron Curtain, Romania got exposed to new technologies through hardware and software corr~paniesof developed countries, which started to operate in the Romanian market. The former IT centers closed down or decreased their activities dramatically. Their rigid structures were unable to face the new technologies. Most of the qualified staff migrated to foreign companies employed as sale or service consultants and a few of them started their own businesses. At the beginning of the 90's, most of these companies were involved in selling hardware. Due to their contacts with various foreign companies looking for cheap and qualified labor for the production of software, some of the hardware firms switched their focus to this sector. Some of the specialists have also set up their own software campanies. At present, there is a significant number of IT companies, either operating independently or as branches of foreign firms. These companies are clustered mainly in Bucharest and in a few other large cities.
The success of the Romanian software businesses that export is based on the fact that they are affiliates of foreign companies that seek cheap labor costs. Moreover, many independent software companies have a small foreign client portfolio, usually with a single client that takes advantage of the respective companies' inability to penetrate into other markets.
Most of the exports of software are programs executed on request by foreign clients, while proprietary programs have a small share of software companies' businesses.
51 Genesys, GeCad, SoMn, Siveco, Algoritma, etc.
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Practically, very few Romanian companies export proprietary software; the most significant ones are GeCad and Softwin.
Competition is very high in the domestic market, especially in public procurement contracts for purchases of hardware.
Most of the IT companies are small (76% of companies have under 10 employees, while only 2% have over 100 employees). However, the turnover ratios for these firms are high. Romanian companies tend to pay low attention to the value chain, and are confronted with problems with cash 'Flows, quality control systems, project management and marketing.
Related and Sup~ortinaIndustries In Bucharest, software companies have started associations, and communication among firms is growing. The legal structure for establishment of knowledge parks is in place but there are as yet no such parks set up in Romania.
The most important supporting sector for IT businesses is the telecommunications sector, although it has not yet reached the desired level of development. Unfortunately, the small size and financial capacities of Romanian firms have not allowed sufficient growth of a business services sector, another supporting industry for the IT sector.
D. Role of Government
The IT sector is entirely in private domain, and the government is playing no great role. Although a national strategy was drafted and the legislation for establishment of knowledge parks was passed, no governmental support was given to the companies in the IT sector. To further develop the sector, the government could assume a more proactive role and support to the IT sector could be given through government procurement policies focused on IT.
E. SWOT Analysis Table
Strengths Weaknesses - Highly skilled labor - High turnover of staff and high - Low labor costs (although higher than relocation of IT specialists to foreign national average) countries - Good language skills - Low domestic demand due to low (EnglishIFrenchlGerman) domestic purchasing power - IT associations (IT associations are - Exports mostly based on contract work, becoming more vocal in their demands not proprietary products for government support in the form of - Domestic firms are dependent on a few improved legislation, fiscal facilities and major clients setting of a national IT strategy) - Telecommunication infrastructure still - Strong domestic competition fostering weak higher productivity - Export-oriented industry - Low entry barriers
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Threats Opportunities - Low R&D spending - Development of a science and - Over-reliance on few customers technology park - Strong competition from foreign firms - Huge potential domestic demand, as the national economy will start catching up with the developed countries - Improvement of universitylindustry collaboration - Increasing FDI
F. Fairbanks-7 Opportunities
1. Improving customer understanding As software companies increase their knowledge of their foreign and domestic clients, they will be in a better position to serve the needs of their customers. 'The demands of Romanian clients are growing increasingly and becoming more sophisticated in their requirements.
2. Exploring forward integration Universities-IT business integration is essential for innovation spin out and to achieve competitiveness.
3. Innovation Romanian companies should focus on expanding their efforts more on research and development to start developing and marketing propi-ietary software and should strengthen their brand names through innovation.
4. Cooperation within cluster The IT firms, universities, and telecommunications sectors need to increase communication and take advantage of acting as a cluster. The association of IT companies and the IT National Council are good starting points in establishing cooperation and commur~icationwithin the cluster.
5. Understanding competitive position The IT firms in Romania should study their competitive position in the global market, learn about their competition, and identify opportunities for growth. They should invest in training and skills development in those areas that will bring growth in the years to come.
6. Avoiding over-reliance on basic factors Romanian IT firms should avoid setting their strategies based on basic factors such as cheap labor and contract based work, but integrate advanced factors such as specialized skills and availability of advanced technology into their business strategies to increase their competitiveness.
7. Avoiding government paternalism A new Ministry of IT and Communications and a new Parliament Commission for IT and Communications are positive developments. However, while offering the necessary
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support to this infant industry, the government should encourage competition and avoid protectior~ism.
G. Looking Ahead
The IT sector is a fast growing sector where Romania has a great potential. Efforts should be spent for developing science and technology parks. These parks present a platform for synergies to be created as services companies such as consulting, training, and financing firms locate in these parks, and take advantage of the high technology infrastnrcture at a reasonably cheap cost to serve their clients.
The government should support the domestic industry through public procurement policies. h here is a widespread need at the national level for electronic databases. A solution to overcome this need as proposed by members of the business community is that the government should lease the administration of country databases to private firms. This would boost business opportunities for the private software producers, while improving accessibility and ease of use of such databases.
6.4 Tourism
A. Industry Definition
Although tourism by definition covers a wide range of activities and products, it, for the purposes of this study, is limited to the activities carried out and the products offered by hotels, restaurants and tourist agencies.
Romania offers a wide range of tourism products including seaside, mountain and ski resorts, spas and health resorts with treatment facilities for numerous diseases, cultural heritage sites (the painted monasteries of Northern Moldova, the medieval town of Sighisoara, etc.), and wildlife preserves (Danube Delta).
B. Industry Background and Performance
Tourism in Romania started up in the 60s and 70s in the form of mass tourism, with low prices and standard accommodations. Besides Romanian customers, it catered for tourists from the COMECON market (especially East Germany, Poland, Czechoslovakia) or for low-income tourists from Western Europe.
After 1990, the Romanian tourism sector experienced a drastic decline, as citizens of ex- socialist countries (including Romania) were able to travel to countries outside of the communist block, and due to a dramatic drop in purchasing power of most of the citizens of these countries. Romania started importing more tourist services than it exported. In 1998, the number of arrivals to Romania for rest, leisure and holiday purposes was about 2.784 million, while the number of departures for the same purposes were 6.129 million. Romania lost its share in its traditional markets such as Germany to competitors like Turkey, which offered a very attractive pricelquality ratio.
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Most of the recent arrivals to Romania are from neighboring countries (mostly Republic of Moldova and Hungary). Within the EU, most of the arrivals to Romania are from Germany and Italy.
C. Diamond Analysis
Factor Conditions Romania has a temperate climate and a very diversified landscape, ranging from mountains to hills and plains. It also has seaside resorts on the Black Sea coast, and the most important wildlife reservation in Europe (the Danube Delta). While the season for the seaside lasts only for three months per year (June to August), the mountain resorts as well as the numerous health spas, a constant attraction to foreign tourists, are open throughout 'the year. Romania also benefits from cultural vestiges (from Greek and Roman ruins to Saxon-built medieval towns in Transylvania or the famous painted monasteries of Northern Moldova).
Romania's tourism infrastructure was built mainly in the 1960s-70s and was targeted for mass tourism. There were no significant investments to upgrade the infrastructure since then and currently the infrastructure is in a worn-out state. In the late 1990s, investment was targeted for improving existing infrastructure and for building new facilities, and hotels were upgraded, widening the range of possible accommodations. However, four- and five-star accommodation facilities represent only 1.9% of the total number of establishments and 2.7% of the number of places in hotels.
Demand Conditions Due to the dramatic drop in domestic purchasing power during the economic transition period, domestic demand for tourism has fallen drastically, particulal-ly hitting the resorts targeting the lower end of the market. The higher-income segments of the population have taken advantage of the opening of the borders and traveled to foreign destinations. Thus, in the year 2000, the expenditures by Romanian tourists traveling abroad have been around US$450 million, while Romanian receipts from foreign tourists visiting the same year were around US$460 million.
In the 1970s, most of Romania's foreign tourists originated from European countries like Germany, Great Britain, Scandinavian countries, France, Italy, and from other socialist countries (East Germany, Czechoslovakia, Poland). Starting with the 80s, the number of foreign tourists decreased significantly. In the 1990s, the decreasing trend in the number of foreign tourists continued, falling from 6.5 million foreign visitors in 1990 to 5.2 million in 1999. In the first 3 quarters of 2000, the foreign visitors to Romania mainly originated from the Republic of Moldova, Hungary, Bulgaria, Ukraine and Germany.
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ROMANIAN TOURISM INDUSTRY DIAMOND -I+ Incomplete and delayed privatization + Varied geographical - Focus on low-end of market conditions: mountains, seaside, -I+ Weak but improving promotion of delta, and plains Romania as a holiday destination + Varied tourism packages: - Low usage of capacity health resorts, ski resorts, - Weak management & marketing seaside resorts, cultural tourism, wildlife (Danube Delta, - Uncompetitive pricelquality ratio hunting), thematic tourism (Dracula etc.) -I+ Worn out but improving infrastructure
- Seasonal demand for sea-side
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Stratesrv, Structure and Rivalry As of 1998, there were 98,000 people employed (1 .I1% of total employees) in hotels and restaurant^^^ in Romania. There were 10,147 such enterprises, of which the number of establishments providing accommodation for tourists was 3,127, with an accommodation capacity of 287,268 beds. The capacity utilization index for 1998 was only 36.1 %. Romania had 4.831 million arrivals in 1998, over 73% of them arriving by road, some 12% by rail, another 11% by air and the remaining by naval transport.
Tourism is one of the sectors of the Romanian economy where privatization is lagging behind. Thus, there are still 58 companies to be privatized, holding 49% of the overall social capital of tourism companies. The privatization method chosen to privatize tourism companies was proven to be disastrous as the managers who bought shares in these companies were not interested in investing in the respective firms, but just skimmed the profits. Neither was the management of tourism companies through the Ministry of Tourism a success. The setting of prices in state-owned firms in a centralized manner has hurt profits.
Many private players have emerged, especially as tourism agencies, small hotels, and "bed and breakfastn facilities. The tourism sector in Romania has centralized in sonie main tourist zones (Black Sea coast, Prahova Valley mountain resorts, Bucovina, Bucharest area). However, these geographical clusters have unfocused strategies. The Black Sea Coast and the Prahova Valley are dominated by large, formerly state-owned companies that impose high prices.
Small players in the tourism sector do not have long-term marketing strategies. A common problem for the tourism sector is the low standards of quality and lack of coordination among companies to attract foreign tourists. Firms do not differentiate their products much and view market segments only from an income point of view.
The promotion efforts are undermined by rigidity in adapting to demand requirements. The private sector, although more adaptable and flexible than the public sector, is hindered by lack of financing.
'The rural tourism component is starting to have better representation. There are more and more rural households meeting tourist standards that offer vacations in unspoiled countryside, with such attractions as organic, homemade food, and folk traditions. Local authorities are also more aware of the importance of tourism for the local economy, and are organizing local events with tourist appeal (festivals, fairs). The restoration of old city centers has also contributed to bolstering tourism.
Related and Supportina Industries As holiday destinations and senrices diversify, the growth opportunities for Romanian tourism increase. There is more information available on tourism products, ranging from tourist guides and brochures to web sites on the Internet.
The transport and telecommunications network has improved. 'The road network is being overhauled, main airports have been modernized and enlarged and there are more international airports throughout the country. The railway facilities were also
52 No statistical data available for tourism agencies
J.E. Austin Associates, Inc. 53 Romania National Competitiveness Report upgraded. Romania has a number of airports reaching throughout the country and four international airports. There are direct flights to Bucharest from all major European cities and 15 airlines from other countries have offices in Bucharest.
While the entertainment infrastructure is modest and needs improvement, there are plans for a major entertainment park named Dracula Land to be built with foreign capital. Major cities like Bucharest have a wide range of restaurants, casinos, discos, bistros and nightclubs. 'There are also various attractions such as museums, theaters and opera houses.
An industry closely linked and complementary to tourism is the handicraft industry, whose products are displayed for sale from elegant shops to outdoor stalls near tourist attraction centers. Rugs, ceramic ware, embroidered national blouses and various wood and wicket articles are made and sold by local artisans.
D. Role of Government
The Ministry of Tourism coordinates and supports the activities in the tourism sector. There is also a National Authority for Tourism and a National Institute for Research and Development in Tourism. At present, harmor~izationof the Romanian legislation on tourism with the EU legislation on tourisrr~is 85% complete. The Law on Rural Tourism was passed in 1998, providing incentives for this activity. The present government has placed tourism on its list of priorities.
The National Tourism Authority, through its Tourism Promotion Office, has been promoting Romania as a tourist destination more aggressively in recent years. It has prepared a National Strategy for medium-term development of tourism (2000-2004) and has been trying to attract foreign investment in the tourism sector.
The government has set up a 3% tax on tourism, to be used for tourism promotion. However, this fund goes to the Ministry of Finance, not directly to the Ministry of Tourism and the tax is only applicable to hotels with restaurants and tourism agencies.
Another issue that the government needs to focus its efforts on is elimination of bureaucracy, as there are a lot of duplicative procedures for obtaining licenses and approvals. Environmental protection is yet another issue concerning tourism, and the Ministry of Water and Environment should increase its efforts in this area.
E. SWOT Analysis Table
Strengths Weaknesses
- Variety of natural and cultural - . Dominance of "low quality-low price" approach resources - Image problems (gypsies, street children, - Proximity to EU market instability in the region) - Low prices - Weak management and marketing skills - Warm, hospitable people - Obsolete and worn-out accommoda~tion - Widespread language skills infrastructure (English, French, German, - Weak supportirlg sectors (amusement facilities Italian, Hungarian) etc.) - Low quality of transport infrastructure
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Threats Opportunities - Over-reliance on low-end - Development of rural tourism, especially in market segments areas with an unspoiled landscape - Incomplete privatization - Increasing FDI - Competition from other - Improvement of infrastructure (transport, countries telecommunications, accommodation, ski slopes etc.) - Establishment of a new seaside resort near Sulina, at the mouth of the Danube - lncreasing differentiation of tourism packages - More aggressive government promotion of Romania as a holiday destination
F. Fairbanks-7 Opportunities
Improving customer understanding Tourism companies should improve their understanding of customers. They should better segment the market and use different approaches and products for the various segments.
Exploring forward integration Hotels and tourism operators should improve their cooperation and integration, thus the promotion efforts carried out by tour operators should be backed by an improvement in the quality of services offered. lnnova tion Create products that will allow Romania to occupy niches in the upper end of the tourism market (hunting tours, health tourism etc.), as well as to turn unique factors into profitable businesses (D~~cIJ~myth, Danube Delta wildlife and flora).
Cooperation within cluster Increase sharing of information and ideas, work together for promotion on foreign markets, lobby jointly for better legal framework.
Understanding competitive position Understand Romania's competitive position on various markets, its corr~petitorsand market requirements, in order to improve services and gain more market share.
Avoiding over-reliance on basic factors Promote products that will reduce the dependence of the tourism sector on the summer season (especially promote conference tourism), promote more sophisticated packages.
Avoiding government paternalism Speed up privatization to reduce the participation of the state in the sector, rely less on promotion carried out by state agencies, shifting to promotion carried out jointly by the private sector.
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G. Looking Ahead
Romania has a big tourism potential, which it should put to better use by stimulating investment in the sector (including FDI), upgrading its facilities and addressing higher- income segments. Romania should continue to develop its private tourism sector (including rural tourism) and should try to widen the breadth of its international markets, while increasing its share on its traditional and large markets (Germany, Hungary).
For better tourism promotion, regional Promotion & Visitors Bureaus should be set up in each county that should work together with the local community, the County lndustry and Trade Chambers and other interested parties in promoting regional tourism centers. Such centers should also have information offices at border points.
Minimum quality standards should be set, as well as evaluation methods, in order to increase the overall quality of tourist facilities.
Stricter environmental controls should be applied, especially in places with major tourist inflows, where pollution arises from unauthorized construction, such as the spilling of wastes into waters, etc.
6.4 Wood and Furniture
A. Industry Definition The industry as defined here comprises wood processing from saw milling and planing of wood in the manufacture of various wood articles, including furniture. To this end, data based on the NACE classification has been used for analysis, and the analyzed industry comprises NACE groups 201 to 205 and 361. The most important sectors with regards to industrial production are furniture (NACE 361) and saw-milling and planing of wood, impregnation of wood (NACE 201).
B. Industry Background and Performance In 1999, the Romanian wood and furniture industry comprised 8,245 companies, employing about 81,000 persons in the wood industry and 124,000 persons in furniture and other non-classified activities (Tables 6.2 and 6.3). Most of these companies were exporting 80-90% of their production, and the majority of them were classbfied as SMEs.
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Table 6.2: Number of ~rivatecom~anies
NACE Field Total number Total number % change in Code of firms in offirmsin numberof 1998 1999 firms 1998-99 I 201 ISaw-milling and planing, impregnation 2655 3095 1 17% of wood 202 Manufacture of veneer sheets; I lmanufacture of plywood, board and panels 203 Manufacture of builders' carpentry and ioinerv 204 Manufacture of wooden containers 205 Manufacture of other products of wood; articles of cork, plaiting materials 361 Manufacture of furniture
I I Source: Romanian Statistical Yearbook 1999
Table 6.3: Average Number of Employees (thousand persons)
Total 8156 6160 5369 Forest harvesting, forestry and hunting 107 83 61 Wood processing (excluding furniture) 94 77 81 Furniture and other non-classified activities 204 141 124 Source: Romanian Statistical Yearbook 1999
Romania has a tradition in wood products and furniture and was once a major exporter of furniture. The sector holds an increasing percentage in the total exports of Romania. In 2000, furniture exports totaled about US$474.2 million (4.6% of total exports), while exports of wood products (excl. furniture) were about US$564 million (5.4% of total exports). Exports of timber represented US$364.3 million or 3.5% of total exports. However, large state-owned companies have not done well during the transition period, and have been affected by obsolete and worn-out equipment, a lack of restructuring and lack of direct links to foreign markets. The industry experienced a rapid increase in the number of privately owned firms, most of the current companies being small and medium sized.
C. Diamond Analysis
Factor Conditions Romania's forests are one of its riches. Totaling 6.672 million hectares in 1998, the surfaces covered with forests represent 28% of the total land in Romania. The most important sources of tirrtber are coniferous species, followed by beech trees.
Labor is cheap and well skilled. The Forestry University in Brasov, Brasov County, offers graduate level programs. There are also some schools that provide specialization in forestry-related fields, such as the Forestry College ("Scoala post-liceala silvican),that prepares forest technicians (rangers), and the School for Foremen ("Scoala post-liceala de maistrin), that graduates foremen for wood harvesting, wood processing and
J.E. Austin Associates, Inc. 57 Romania National Competitiveness Report mechanics. The "Stejaruln Research Center functions as an autonomous agency and develops basic and applied inter-disciplinary researches in natural sciences.
As seen in Table 6.4 below, most fixed assets are within the furniture sector. Both subsectors increased their share in total fixed assets since 1990. The figures, however, do not show the fact that most of the equipment in the industry is old and worn-out, a fact that reflects on the quality of the final products.
Table 6.4: Fixed Assets by Subsector (Billion Lei current prices) 1990 1995 1998 Total industry 1766 99902 250765 Wood processing (excluding furniture) 15 798 2955 Furniture and other non-classified activities 18 1453 3457 Source: Romanian Statistical Yearbook 1999
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ROMANIAN WOOD AND FURNITURE INDUSTRY DIAMOND
+ Tough, price based competition + Export oriented industry - Strategies are based on low costs and labor-intensive processes + Favorable geographic + Vertical integration and product location for access to EU market + High quality of wood resources + Existence of R&D institute, wood exchange - High cost of capital
- Low brand loyalty + Emerging association and - High price sensitivity - Dependence of manufacturers - Lack of quality product design on a narrow range of foreign - Upstream sectors in need of deep restructuring (accessories,
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Demand Conditions The local demand for wood products is low but increasing and getting more sophisticated in Romania. Domestic sales are affected by the population's low purchase power. Exports are mostly of furniture, followed by products from NACE 201 - Crude processing of wood and wood impregnation. The main export markets are Western Europe (Italy, Spain, Germany) and North African and Arab countries (Tunisia, Morocco, Egypt, Saudi Arabia, Indonesia, Singapore).
The bargaining leverage of the buyers is high in Romania, squeezing the profit margins of the manufacturers. This is due to the fact that there is a low firm concentration, while buyers are more concentrated and usually buy in high quantities. Romanian manufacturers do not have access to distribution in foreign markets, thus depend on few buyers, very often just one.
Stratenv, Structure and Rivalrv The industry is totally privately held. In 1999, there were 6719 private firms in wood processing (excluding furniture) and 1526 private firms in the furniture sector. The concentration index is extremely low, indicating a competitive market.
Competition is strong and mostly price-based, as there are no strong brand names, product differentiation is weak and there are many entrants. The industry has been growing strongly, but the products are for the lower end of the market, with low value- added. Knowledge about various market opportunities is low and manufacturers rely on personal contacts to gain access to new markets. Management and marketing skills are not fully developed.
Labor productivity, of only ECU 6,00O/person, is significantly lower than that of Western- Europe manufacturers' ECU 50,000/person1due to the technologic gap. Energy costs account for more than 10% of the total production costs, compared to 2-3% in West- Europe; and credit costs, due to high bank interest, represent more than 10% of the total production costs.
Related and Supportinn Industries An important player to-be in the wood industry is the Wood, Paper and Construction Materials Commodity Exchange (BLHMC), situated in Piatra-Neamt. Set up in 1994 as the first specialized commodity exchange in Romania, the exchange is a member of the Romanian Commodity Exchanges1 Union. It has branches in all main centers of the wood industry. The exchange is a market for Romanian raw materials and products, as well as specific technologies. The Romanian Foresters Association (Asociatia Forestierilor din Romania) is a body that provides professional attestation for the companies in the field, as regards technical endowment, skilled labor force etc.
The wood equipment sector is not very supportive of the wood sector. UMARO SA - Roman, the largest manufacturer of wood harvesting and processing, produces 63 types of equipment. The wood industry has naturally clustered around resource-rich areas, and was followed by the equipment manufacturers. Equipment used is generally made in Romania, with some equipment from Germany and Italy, two worldwide leaders in wood equipment. The equipment used, particularly the drying kilns, is very expensive.
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The design of wood products is not very sophisticated in Romania and negatively impacts the ability of the wood furniture subsectors' ability to meet the market deniand.
D. Role of Government
The ROMSILVA National Forestry Regie is the state authority empowered to manage the public property forestry fund. It organizes tenders for the wood plots. The exports of wood products are liberalized.
'The Ministry of Industry and Trade has started a project called Strengthening Romania's Export Capacity, financed by the UNDP and the Swiss government, aimed at granting assistance for the development of export production and diversification of export markets for the furniture industry. Support will be given to the Fashion Institute, the National Wood Institute and the Association of Furniture Manufacturers from Romania to improve their capacities to offer technical assistance to small furniture manufacturers in Romania. The program aims at increasing the design capacity at the SME level, diversifying the product range and penetrating on new markets.
E. SWOT Analysis Table
Strength Weaknesses - Low labor costs - Poor forest access roads - Skilled labor - Obsolete equipment - High quality of wood resources - Low value-added products - Tradition in the field - Weak domestic brands - Proximity to EU market - Weak domestic furniture product design - Good quality of existing vocational - Weak management and marketing skills training and of research institutions - Poor direct access to foreign markets - Existence of Wood Commodity (dependence on intermediaries) Exchange - Inconsistent quality
Threats Opportunities - Competition from other neighboring - Increase in FDI countries - Development of strong domestic brands - Squeeze of profit margins by - Development of Wood Exchange intermediaries - Upgrading of equipment and - High exports of low processed products technologies - Better knowledge of foreign markets
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F. Fairbanks7 Opportunities
Impmving customer understanding Businesses in this sector are mostly small firms that lack sufficient knowledge of customers, especially as regards to foreign markets. Dissemination of information as regards trends in design, quality standards, market demand etc. would be extremely useful towards increasing exports.
Exploring forward integration Better integration between the wood processors and the furniture manufacturers could cut down costs and improve competitiveness of the sector.
Innovation Support should be given by the state in fostering innovation and improvements, as well as in strengthening cooperation between research institutes and the private sector.
Cooperation within cluster There are several associations in the industry, such as the Association of Furniture Manufacturers. However, more should be done in order to increase sharing of ideas and dissemination of information, as well as a better coordination between education and vocational training and the needs of the industry. There should also be cooperation between the designers (the Fashion Institute) and the furniture manufacturers.
Understanding competitive position Although at present the industry is addressing the lower end of the market, having lost a great part of higher income segments, it should be helped to regain such higher income markets. Romania can occ~.~pyniche markets (i.e. there is a tradition for sculpted furniture).
Avoiding over-reliance on basic factors Higher value-added products should replace the high percentage of exports represented by crudely processed timber.
Avoiding government paternalism There is no government paternalism.
G. Looking Ahead
The wood industry, and especially the furniture sector, has a great potential for exports. ,However, in order to improve their competitiveness, the firms need better access to financing to upgrade their equipment, to purchase the required inputs, as well as to be able to carry out exports.
Updating of technology and management and marketing skills should be the focus of improvement efforts. Since the low labor cost strategy is not sustainable in the long run, the companies should focus on moving forward in the value-added chain, which will be the best strategy for increasing output, exports and employment in the sector.
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The state should aid the sector by offering a stable and coherent legal environment, with better contract enforcement. It should also offer facilities to the companies investing in better technologies and increasing the value-added content of their products. Since the industry has a big potential for exports, there should be programs developed for promoting more strong Romanian furniture manufacturers and dissemination of information and market research studies to help them better understand market demands. Support should also be given by the state in fostering innovation and product development.
Better integration between the wood processors and the furniture manufacturers could cut costs and improve competitiveness. An increase in sharing of ideas and dissemination of information, as well as a better coordination between education and vocational training and the needs of the industry, will help the sector to increase its global competitiveness.
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CHAPTER 7 - COMPETITIVENESS CONSTRAINTS IN ROMANIA
Romania's progress in stabilization and reform since 1989 has been limited compared to many transitional economies in Europe. 'The country's foreign debt burden, the impact of the UN trade embargo on Yugoslavia between 1992-95, and most importantly, its adoption of stop-and-go macroeconomic policies have all contributed to low economic growth, high and variable rates of inflation, and periods of severe balance of payments pressures. Faced with the threat of imminent crisis, decisive measures were taken by the government in early 1999 to stabilize the economy; and, as a result, a slight economic recovery was witnessed in Romania in 2000.
Overall, Romania faces various weaknesses in its political and economic environment that hampers its ability to achieve higher competitiveness, and, therefore, better overall economic development. Major constraints, based on JARS study of the Romanian economy and industry clusters, are summarized below into two sub-sections: (1) general competitiveness constraints, and (2) industry-specific constraints. It is worth noting that many of these constraints are similar to those confronted by other transitional economies in Southeast Europe.
7.1 General Competitiveness Constraints
Although the government has indicated its commitment to furthering economic reform, there is uncertainty about sustained political stability in Romania. Challenges in reconciling different goals between the member parties in the coalition, and maintaining the consistency and appropriateness in Romania's macro-economic policy, contribute to increasing uncertainty in the country's investment environment, as well as affect negatively the public confidence in the government's credibility. In addition, the government also faces tension in inter-ethnic relations and minority rights, due to discrimination against the Roma and the existing illiberal legislation regarding human and minority rights. Failure to address these tensions and conflicts could clearly threaten Romania's political stability.
Romania has been able to marginally improve the country's overall economic performance for 2000 after three consecutive years of decline, but weak and unsustainable economic growth has been detrimental to investment. Poor economic growth cannot generate sufficient domestic demand or national savings to stimulate investment in various industries, and thus constrains their development.
Romania needs consistency and persistency in its political decision taking process. Stop-and-go macroeconomic policies have been adopted in Romania since 1989. Romania's leadership needs to consistently and persistently pursue more decisive reform measures to achieve economic stability and prosperity for the country.
Romania lacks an action-oriented roadmap for its development, and the capacity to translate words into concrete action53.According to the World Bank, Romania needs to
53 Summary on feedback on World Bank's draft Country Assistance Strategy for Romania, February 200 1
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prioritize its objectives, and develop its multi-year action plan to translate it into specific, phased and time-bound actions.
The quality of law enforcement is also seen as an area of serious concern. Investors have been complaining about the inadequate enforcement as well as arbitrary interpretation of laws and regulations.
A weak governance system deters investment in Romania. A poor governance structure gives way to arbitrary interpretation and ineffective implementation of laws and regulations, as well as widespread corruption at different levels, which is seen as a serious obstacle to investment in Romania.
Though significant improvements have been made to the legislation and institutional framework, a deficient policy framework discourages both domestic and foreign investors. For example, Romania needs to streamline its land construction permit procedures, and the approval procedures for special types of investment.
Reform has been carried out in the banking sector, but the system is still weak, with a low level of intermediation, high cost of capital, severe lack of financial discipline, and poor allocation of creditm. This situation clearly hampers the private sector's ability to access credit, and thus restricts investment in the economy.
Corruption and non-transparent procedure deter private investment. According to Transparency International, Romania ranked 63'tl out of 99 countries in terms of Corruption Perception Index in 1999.
'There has been a lack of strong private investment in the Romanian economy. Romania's domestic private sector remains weak. Various factors can contribute to this underdevelopment, which include, for example, a deficient policy framework, constrained macroeconornic development, inadequate credit access, a lack of information about domestic and foreign markets, and ineffective implementation of laws and regulations.
Romania's poor physical infrastructure is a constraint on its economic development. Romania's highway and rail network has deteriorated substantially, and is far below the standards of other European countries. Its telecommunications network is also outdated. In addition, Romania's systems of primary energy production and power generation are inefficient, making it a substantial net importer of energy.
Delayed engagement in higher-technology and higher value-added economic activities cause a further erosion of Romania's competitiveness. During the past years Romania has been over-relying on low-price and labor-intensive competition, but the competitive advantage of this strategy has been declining over time, largely as a result of corn etition from other low-cost countries. In 1998, Romania's high-tech export was only 2%"of total manufactured exports, which was among the lowest in SEE as well as in the world.
- -- - -
54 IMF Staff Country Report No. 0111 6, January 2001
55 The World Development Indicators, The World Bank, 2000
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Lack of focus on international markets combined with its domestic market undermines Romania's competitiveness. Romania's domestic market is larger than many countries' in Southeast Europe. Nevertheless, a strong focus on the demand from outside markets can help Romania generate more domestic production and exports out of the country, and thus better stimulate its economic growth.
Romania has a cheap labor force, but lacks a market mentality and management system as well as access to information about both domestic and foreign markets in order to compete better in a new global market context. There is a lack of entrepreneurial mentality, marketing and management skills, which are essential not only for new business development, but also for renewal in existing companies in any sector, from tourism to apparel and IT, which will be illustrated in the following subsection. In addition, industries also suffer from a shortage of information about domestic markets as well as foreign ones and access to them.
There is a lack of private sector consultation in the government's policy-making. The government has made certain efforts to involve the private sector in the policy formulation process. However, there is as yet neither a mechanism for the private sector to collectively present their own feedback on the government's policies, nor one to ensure proper and timely follow-ups on their policy recommendations.
7.2 Industry-specific Competitiveness Constraints
The following paragraphs offer a brief analysis of the constraints that would face Romania in the development of four illustrative industry clusters, apparel, IT, tourism, and wood and furniture, which JAA investigated in its Competitiveness Exercise in Romania. It is apparent that these industry-specific constraints reflect the general issues discussed in Sub-section 7.1 of this report, and are similar in many ways to those constraints facing industries in other transitional economies in Southeast Europe.
Apparel Romania has so far relied on the exploitation of a low-cost and labor-intensive strategy to compete with other countries. Like in many other SEE countries, the industry has experienced an erosion of its competitiveness over the past decade. The following are some of the main factors that have contributed to this decline: Declining labor cost advantage, due to competition from other low-cost countries; Strong competition from illegal irr~portsof finished products; Delays in developing and securing a strong access to foreign markets; lnadequate information about both domestic and external markets; lnadequate access to financing for domestic private firms; A lack of product differentiation; A lack of foreign investment in the sector, which is considered a crucial source of management know-how, technology transfer, and access to foreign markets; A lack of transportation cost advantages, due to Romania's poor infrastructure condition; Increasing transaction costs due to administrative bureaucracy; lnadequate recapitalization and restructuring efforts to infuse new technology into the industry, and to establish industrial linkages that help Romania engage in high value-added activities;
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A lack of strong private sector investment, which is considered a driving factor behind any country's sustained growth and employment generation; A lack of strong individual companies that pioneer and lead the technological change and upgrade the processes in the industry; A lack of market-oriented management and marketing skills that can improve efficiency in the industry, make Romanian brand names better known in the world markets, and proactively find new markets for Romanian products; and A lack of an overall industrial strategy and coordination/cooperation within the industry in order to acquire new technology, share market information, or access new markets.
Information Technology (IT) Romania has built up reasonable levels of technological capability in the production of both hardware and software following the building of its first computer in 195756. Nevertheless, its IT during the communist era was largely based on Western technology, and there was a major technological lag between Romanian hardware and that available in Western countries. Since 1989, Romania has been trying to further develop the sector, including the gradual liberalization of the telecommunications sector and the encouragement of foreign investor participation in the IT sector. However, the development of Romania's IT remains limited. Major impediments include the following: Inadequate legal and regulatory framework to support the sector, particularly the export software trade; A lack of reliable electric supply, and of reliable and pervasive telecommunications infrastructure that links both domestically and internationally, to support Romania's software exports; A lack of a sizeable or demanding domestic market that can stimulate the sector's development, or attract IT multinationals into collaborative relationships with local partners to serve such a market; Obsolete technologies; A lack of information about both domestic and foreign markets; Limited participation of foreign investors who could introduce new managerial know-how and technology to the industry; A lack of entrepreneurship, marketing and management skills that could bring more international exposure and experience to domestic firms; Ineffective protection and enforcement of intellectual property rights; A limited R&D base, and insufficient investment in R&D for new technologies and software; A lack of private sector consultation in policy formulation to support the industry as well as in R&D activities; and A need for more proactive policy support from the government to stimulate the growth in the industry and make it internationally competitive.
56 Romania's Hardware and Software Industry: Building IT Policy and Capabilities in a Transitional Economy, Mihaiela Grundey and Richard Heeks, 1998
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Tourism Romania's rich natural resource endowment offers many opportunities for a strong tourism development. The sector so far has been following a low-end, low-price competition strategy, and suffers from a lack of quality and strategy that could increase its competitiveness relative to other countries in the region. Major constraints on the tourism industry in Romania include the following: Erosion of competitiveness in the low-cost competition strategy due to price competition from other countries in the region; Delayed engagement in high-end and more sophisticated tourism products; Limited knowledge of outside markets and high-end product segments; Degrading and inadequate infrastructure facilities, including roads, hotels, telecommunications, airports, and utilities; A lack of quality market-oriented customer service; A lack of management and marketing skills that can increase efficiency, attract more clients, and generate high-end demands for the sector; A lack of strong private sector investment in the sector; and An inadequate legal and regulatory framework to support the sector.
Wood and Furniture The wood and furniture industry plays a significant role in Romania's economic development. In 2000, furniture exports accounted for 4.6% of total exports, while exports of wood products (excluding furniture) were 5.4%". The industry faces a number of constraints on its long-term development, which can be summarized as follows: Reliance on price-based competition, the corr~petitivenessof which is eroding over time due to competition from other countries; Delayed engagement in high-end and more sophisticated products; Weak domestic product design capacity; Weak domestic brand names; Limited domestic purchasing power; Weak manufacturer bargaining leverage due to the industry's low firm concentration; Limited knowledge of outside markets and high-end product segments; Dependence on a few buyers and intermediaries; A lack of access to foreign markets and their distribution networks; A lack of transportation cost advantage due to degrading and inadequate infrastructure facilities; A lack of quality market-oriented customer service; A need to maintain consistency in product quality; Obsolete equipment; A lack of management and marketing skills that can increase efficiency, attract more clients, and generate high-end demands for the sector; and An inadequate legal and regulatory framework to support the sector.
57 See Chapter 6: Industry and Firm-level Competitiveness
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CHAPTER 8 - ANALYSIS OF PRIVATE-PUBLIC DIALOGUE IN ROMANIA
8.1 Introduction
Following a long and painful period of lack of communication between the private and public sectors, attempts have been made during the recent years to institutionalize private-public dialogue on irr~provingthe business environment and the competitiveness issues.
The initiative was put together by the private sector business associations, which have allied themselves, first, in the form of two major alliances (the Strategic Alliance of the Business Associations and the Alliance for Economic Development) and, more recently, in the form of a coalition of the two alliances.
Under the pressure of the business community, the Presidential Commission for the Improvement of the Business Environment was set up in May 1999 as a first attempt to institutionalize the private-public dialogue.
The US-Romania Action Commission is another example of such partnership assisted by the prominent U.S. think tank CSIS.
A national vision and dialogue on economic strategy were also encouraged by the World Bank's Comprehensive Development Framework and by the wide national effort in drafting a medium term strategy for EU accession.
E-Romania is an interesting example of a private-public dialogue working group which made a significant contribution to the process of IT medium-term development strategy drafting.
8.2 Overview of Legislation Change Process in Romania
In Romania, new legislation is usually initiated by the government. In 70% of cases, the draft laws are submitted by the government to the Parliament. The rest of the initiatives are generated by the senators and deputies (only after government review).
On average, the legislative process from the submission of the draft law by the government to the final vote takes about two months. In the case of an initiative by the MP, it may take three to four months.
In the process of drafting laws, the government usually does not consult any outside opinion (with the exception of the ministries concerned), such as that of the private sector. Only recently, so-called "social dialogue departments" have been set up in all economic ministries for this purpose.
In order to speed up the legislative process, it has become a common practice for the government to issue Emergency Ordinances, which operate immediately but temporarily, because in order to become laws, the ordinances have to be approved or
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amended by the Parliament. This is a major source of legal instability in Romania, since the ordinances are often subject to change.
The practice of holding public hearings is quite new but expanding in Romania and the initiative of having public hearings was led by the private sector.
According to the Romanian legislation, draft laws should be discussed within the Economic and Social Council (CES), a tripartite social dialogue framework consisting of representatives of government, trade unions and employers associations. While the law provides for a ten-day deadline for CES feedback, in practice, CES has no more than one day to review the laws or emergency ordinances, which renders the mechanism totally inefficient.
8.3 Recent Experiences
The business community in Romania initiated the first serious public-private dialogue in 1999. The issue of concern was drafting a Fiscal Code for Romania. The main parties involved were the business associations and the Ministry of Finance. Members of parliament from both ruling party and opposition were also invited. So far, the basic principles of a Fiscal Code and of a Fiscal Procedures Code have been debated in an ad-hoc Presidential Commission for Business Environment. The Commission's Workirlg Group has drafted a background paper, which was discussed in five public hearings, held both in the capital city, Bucharest, and in other cities throughout the country.
The outcome was a set of Principles for a Fiscal Code and a Fiscal Procedures Code, which was agreed by the Ministry of Finance to become the basis for the drafting of the Code. As a follow-up, it was agreed that the Ministry of Finance's experts were to submit each drafted Code module to be debated within the commission while the business associations were to organize public hearings.
The current agenda of this institutionalized corrrrrrission is to complete the fiscal code by September 2002, to organize each quarter a working meeting and at least three public hearings in Bucharest and in provinces.
The public hearings have been successfully used on other occasions too, such as the debate of Rorrrania's strategy of integration in EU from the business perspective, and it is now being extended to other fields such as the corporate governance code and best practices code.
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CHAPTER 9 - RECOMMENDATIONS
Building Romania's competitiveness requires a complex set of mutually reinforcing activities at the level of the firm and the industry cluster, reinforced by policy and institutional action at the national and local government levels.
Learning from nations that have built prosperity quickly and aided by the foregoing analysis, one can formulate recommendations that deal with the private sector, with the public sector and with the dialogue that connects them. In this process, there is also an important role for civil society institutions, such as business associations, think tanks and social enterprises.
Private Sector Recommendations Firms in the private sector are in very different conditions and no one set of recommendations applies to all. In general, competitive firms will seek direct exposure to the most denlanding customers, clients and markets and adapt their products, services and strategies to respond to the signals that these demanding customers are providing. Being and staying competitive requires openness to change and desire to innovate products, services and processes that respond to the customer needs.
Romanian firms that have exportable products and services now have new opportunities to serve European markets but will need to invest in learning how to take advantage of these opportunities. Firms that have non-tradable products and services and serve the Romanian market can explore trends in neighboring countries that have longer experience with privatization, liberalization and globalization and selectively test the introduction of innovations in Romania. Firms that are not competitive will need to take stock of their human, capital and organizational resources and then migrate to other market segments or even to other industries.
Competitiveness also requires the ability to cooperate as a cluster to be able to achieve this as no one firm can do it all. Competitiveness depends on the ability to form good alliances and partnerships. At the industry level, business associations can participate in efforts representing the business sector before government.
However, it is important to gather together as an industry cluster-that is, the entire value chain plus the related and supporting industries. The industry cluster can then benchmark the industry, develop industry strategies and implement specific action initiatives to boost competitiveness. These will vary by industry. For example, the tourism cluster should formulate specific strategies for attracting higher-spending tourists to Romania and for extending 'the lirr~itedsummer season. The IT sector should explore initiatives for E-Government, reducing bandwidth constraints, boosting software exports and retaining talented professionals. The apparel sector will need to move beyond its focus on providing assembly labor so as to survive after the expiration of quotas in 2005.
Business associations, working with the Government of Romania, can develop international trade and investment linkages to get access to markets and technology. But this undertaking requires greater communication and cooperation between the private sector and the public sector.
J. E. Austin Associates, Inc. 7 1 Romania National Competitiveness Report
Industry clusters can also implement workforce development, human resource and training initiatives by working with education and training providers so that the latter adapt their programs to industry needs.
Another field of activity will be that of research, development, testing and certification initiatives that can add value to the industry while adapting to IS0 and similar standards.
Government-Level Recommendations Policy and institutional reform can be analyzed by industry cluster. For example, in tourism there is a need to complete the privatization agenda. The industry itself is in the best position to design and implement initiatives to migrate from beach tourism to higher end markets such as conference tourism, adventure tourism, and eco-tourism.
In the information technology sector, the government should adopt the European standards for third generation wireless communication (UMTS), promote E-Government, address constraints of bandwidth availability and cost, promote the use of computers in schools and work with universities and training providers to improve the relevance of education programs to the changing needs. The introduction of E-Governance systems contributes to transparency and reduces corruption by making information and services available on the Web.
Romania badly needs a coherent investment promotion strategy and a new agency with a structure informed by best practices and taking into account Romania's specific strengths and weaknesses and the opportunities presented by access to EU markets. Romania can learn from best practices relevant to Europe such as in Ireland, Scotland, the Netherlands, Hungary and the Czech Republic.
Following the example of Ireland, the Government of Romania, with the help of such leading think-tanks as the Institute for International Relations or the Economics Institute, should publish an annual Romania Competitiveness Benchmarking report that could provide sound data on Romania's competitiveness in areas related to investment, exports, technology, human resources, economic policy, economic performance and infrastructure. This would help to inform government leaders and also industry leaders with regard to the strengths and weaknesses of Romania relative to other EU accession countries while helping to inform the efforts to set priorities and monitor implementation.
Romanian Competitiveness Co~~ncil This report recommends that the key private sector leaders establish a Romanian Competitiveness Council, similar to the Commission for Improving the Business Environment, to institutionalize dialogue between the private and public sectors. This Council would establish priorities for reform and communicate these clearly to the government and then monitor implementation. It would also undertake its own initiatives and help coordinate the work of various industry clusters.
The Council would set the initiatives such as the following: Encourage the development of a world class business school in Romania with high involvement of the private sector; Conduct an annual survey of SMEs and systematically remove bureaucratic constraints to business formation and entrepreneurial activity;
J. E. Austin Associates, Inc. 72 Romania National Competitiveness Report
Support the institutionalization of private-public dialogue by identifying the priority concerns; and Cooperate with the government in negotiating access to foreign markets on good terms.
In the early months, it would be useful to have encouragement from the Government of Romania and it would be helpful to have technical and perhaps even financial support to jump-start such a Council. The Council would meet monthly or more often if necessary and would commission specific initiatives designed to build Romania's competitiveness. It would review progress on these and provide leadership and vision.
The Council should work through existing business associations and research institutes and not attempt to duplicate them. It should also build on prior research done on Romanian competitiveness, on policy reform and on specific industry clusters, rather than doing new and repetitive research. The focus should be on action rather than study and on building a self-reinforcing virtuous cycle of private-public cooperation to implement change.
It is impossible in a study of four countries with limited scope and resources to accurately address all of the constraints or to lay out a comprehensive set of well- sequenced recommendations. Nonetheless, it is hoped that this report will serve as a stimulus for discussion and analysis and thereby provide Romania's leaders with the relevant information needed for consensus and allow them to move forward with a preliminary action plan for strengthening Romania's position globally.
J. E. Austin Associates, Inc. 73 Romania National Competitiveness Report
ANNEX 1
COMPETITIVENESS BENCHMARKS
J. E. Austin Associates, Inc. Romania National Competitiveness Report
ANNEX 2
COMPETITIVENESS BIBLIOGRAPHY
J.E. Austin Associates, Inc. Annex 2 - Page 1 Romania National Competitiveness Report
General Competitiveness Works
1. Austin, James E. "Managing in Developing Countries: Strategic Analysis and Operating Techniques." (New York: Free Press, 1990)
2. Beach, William W., and Gareth G. Davis, eds., "The Institutional Setting of Economic Growth." 1999 Index of Economic Freedom. (Washington, D.C.: The Heritage Foundation and Dow Jones and Company, Inc., 1999): pp. xxix- 15
3. Bearnish, Paul, and Peter Killing. "Cooperative Strategies: European Perspectives." (The New Lexington, San Francisco, February 1997)
4. Benneworth, P. "International Competitiveness: A Comparison of Approaches." (North East Competitiveness Project Partnership, Centre for Urban and Regional Development Studies, University of Newcastle-upon-Tyne, 1997)
5. Benneworth, P., and D. Charles. "North East Regional Competitiveness Report 1996." (North East Competitiveness Project Partnership, Centre for Urban and Regional Development Studies, 1996)
6. Best, M. "The New Competition." (Cambridge, MA: Harvard University Press, 1990)
7. Boltho, A. "The Assessment: International Competitiveness." Oxford Review of Economic Policy, Vol. 12, No.3. (1996)
8. Bruning, E., and L. Lockshin. "Fundamental Elements in the Definition of Organisational Competitiveness." Gestion 2000, Vol. 11 (3). (1995): pp. 55-70.
9. Dosi, Giovanni, David J. Teece, and Josef Chyrty, eds. "Technology, Organization, and Competitiveness: Perspectives on Industrial and Corporate Change." (London: Oxford University Press, 1998)
10. Drucker, Peter F. "Beyond the Information Revolution." Atlantic Monthly (October 1999)
11. Enright, M.J. "Organization and Coordination in Geographically Concentrated Industries." E. Driven, J. Groenewegen, and S. van Hoof, eds., Stuck in the Region?: Changing Scales of Regional Identify. (Utrecht: Netherlands Geographical Studies, 1993): pp. 87- 102
12. Fagerberg, J. "Technology and Competitiveness," Oxford Review of Economic Policy, Vol. 12, No. 3. (1 996)
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13. Feldman, Maryann P., and David B. Audretsch. "Science-Based Diversity, Specialization, Localized Competition and Innovation." European Economic Review (1999): pp. 43,409-429.
14. Garelli, Stephane. "The Four Fundamental Forces of Competitiveness." The World Competitiveness Year Book. (1 997)
15. Hamel, Gary, and C.K. Prahalad. "Competing for the Future: Breakthrough Strategies for Seizing Control of Your Industry and Creating the Markets for Tomorrow." (Boston: Harvard Business School Press, 1994)
16. Howes, Candace, and Ajit Singh, eds. "Competitiveness matters: industry and economic performance in the U.S." (Ann Arbor: University of Michigan Press, 2000)
17. Inrnan, B.R., and Daniel F. Burton, Jr. "Technology and Competitiveness: The New Policy Frontier." Foreign Afairs- 69, no. 2 (Spring 1990): pp. 1 16-34.
18. Johnson, Bryan T. "Methodology: Factors of the Index of Economic Freedom." 1999 Index of Economic Freedom. (The Heritage Foundation, 1999): pp. 5 1-68, 78- 80.
19. Krugrnan, Paul. "Competitiveness: An International Economics Reader." (Council on Foreign Relations: United States, 1997)
20. Montgomery, Cynthia A., and Michael E. Porter. "Strategy: Seeking and Securing Competitive Advantage." (Boston, Mass: Harvard Business Scholl Press. 1991)
21. OECD. "Networks of Enterprises and Local Development: Competing and Co- operating in Local Productive Systems." (Paris: OECD, 1996)
22. OECD. "Workshop 1: Enhancing the Competitiveness of SMEs through Innovation." at Conference for Ministers responsible for SMEs and Industry Ministers. (OECD: Bologna, June 2000)
23. OECD. "Workshop 2: Local Partnership, Clusters and SME Globalisation." At Conference for Ministers responsible for SMEs and Industry Ministers. (OECD: Bologna, June 2000)
24. Petkoski, Djordjija. "Vision of the Future and Country Competitiveness: An Integrated Approach." (World Bank Institute, 1999)
25. Porter, Michael. "Competitive Advantages of Regions." (Bulgaria, IME/ World Bank, 1998)
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26. Porter, Michael E. "Clusters and New Economics of Competition." Harvard Business Review. (November1 December, 1998): pp. 77-90
27. Porter, Michael E. "Competitive Advantage: Techniques for Analyzing Industries and Competitors." (New York: The Free Press, 1985)
28. Porter, Michael E., and Roland Christensen, "Microeconomic Competitiveness: Findings from the 1999 Executive Survey." The Global Competitiveness Report 1999. (World Economic Forum, 1999): pp. 30-53
29. Porter, Michael E. "The Competitive Advantage of Nations." (New York: Free Press, 1990)
30. Porter, Michael E. "The Competitiveness of Locations." On Competition. (Boston, Mass.: Harvard Business Review Book Series, 1998): pp. 184- 195
31. Porter, Michael E. "What is Strategy?" Harvard Business Review. (November1 December, 1998): pp. 6 1-78
32. "The Competitiveness Challenge: Special ReporL" International Trade Forum, no. 2 (1998): pp. 12-25
33. "The Model for Success." Business Central Europe. (September 2000.): pp. 18-23
34. U1 Haque, I., ed. "Trade, Technology and International Competitiveness." (Washington DC: World Bank Economic Development Institute. 1995)
35. Westall, A., ed. "Competitiveness and Corporate Governance." (London: Institute for Public Policy Research, 1996)
36. Wolf, Martin. "A Question Of Competition." Financial Times, (December 17, 1996): p. 20
Competitiveness Benchmarking
1. Badrinath, R., K. Mahesh, H. Larre Orono, M. Kahari, and C. Williams. "Benchmarking for Small Enterprises: The International Competitiveness Gauge." International Trade Forum. (February 1998): pp. 14- 19.
2. Bendell, Tony, et al. "Benchmarking for Competitive Advantage." (Pitrnan, 1997)
3. European Commission. "First Report by the High Level Group on Benchmarking" (No.2 1999)
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4. European Commission. "Benchmarking The Competitiveness Of European Industry." (EC, 1997)
5. Harvard Institute for International Development, and World Economic Forum. "The Asia Competitiveness Report 1999." (World Economic Forum, 1999)
6. J.E. Austin Associates, Inc., Harvard University, Institute of Policy Studies, and Org- Marg Smart. "Global Competitiveness Report - Trial Survey Sri Lanka 2000" (USAID, 2000)
7. OECD. "Industrial Competitiveness: Benchmarking Business Environments." (OECD, Paris, 1997)
8. Sachs, Jeffrey, Clifford Zinnes, and Yair Eilat. "Benchmarking Competitiveness in Transition Economies." (Harvard Institute for International Development, 1999)
9. Watson, Gregory H. "Strategic Benchmarking." (New York: John Wiley, 1993)
10. World Economic Forum, and Harvard Institute for International Development. "The Africa Competitiveness Report 1998." (World Economic Forum, 1998)
11.World Economic Forum and CID, Harvard University. "The Global Competitiveness Report 2000." (New York: Oxford University Press, 2000)
12. Yeung, Ophelia M., and John A. Mathieson. "Global Benchmarks: Comprehensive measure of development." (Washington D.C: Brookings Institution Press, 1998)
13. "LMD Special Issue: Competitiveness - South Asia and The Global Challenge." (Media Services [Private] Limited, Colombo, November 1999)
Competitiveness & Globalization
1. Enright, M.J. "The Globalization of Competition and the Localization of Competition: Policies Towards Regional Clustering." N. Hood and S. Young, eds., The Globalization of Multinational Enterprise Activity and Economic Development (London: Macmillan, 2000)
2. Friedman, Thomas L. "The Lexus and the Olive Tree: Understanding Globalization." (New York: Farrar, Straus and Giroux, 1999)
3. Gassmann, Hanspeter. "Globalization and Industrial Competitiveness." The OECD Observer, no. 197 (December 1995 to January 1996): pp.38-42.
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4. Hitt, Michael, et al. "Strategic Management: Competitiveness and Globalization; Concepts." (USA: West Publishing Co., 1996)
5. Lubbers, R.F.M. "The Dynamic of Globalization." First part of a paper presented at a Tilburg Seminar on November 26, 1998.
6. Organization for Economic Cooperation and Development. "Local Economies and Globalization." (Paris: OECD, 1995)
7. Organization for Economic Cooperation and Development. "The Influence of Emerging Market Economies on OECD Countries' International Competitiveness." (OECD, 1998)
8. Porter, Michael E. "Competition in Global Industries." (Boston: Harvard Business School Press, 1986)
9. Rodrik, D. "Has Globalization Gone too Far?" (Washington D.C: Institute for International Economics, 1997)
10. Sachs, Jeffiey. "International Economics: Unlocking the Mysteries of Globalization." Foreign Policy. (Spring, 1998): pp. 97-1 11.
11. Zahra, Shaker A. "The Changing Role of Global Competitiveness in the 21" Century." Academy of Management Executive 13, no. 1 (February 1999): pp.36-42.
Sector Competitiveness
I LAbernathy, Frederick H., John T Dunlop, Janice H. Hammond, and David Weil. "A*------{ Formatted: Bullets and Numbering Stitch in Time: Lean retailing and the transformation of manufacturing- Lessons from apparel and textile industry." (New York: Oxford University Press, 1999)
2. Bredahl, Maury E., Philip C. Abbott, and Michael R. Reed, eds., "Competitiveness in International Food Markets." (Colorado: Westview Press, Inc., 1994)
3. Confederation of British Industry. "Fit for the Future: How Competitive is UK Manufacturing?" (London: CBI, 1997)
4. Department of Trade and Industry. "Competitiveness UK: Our Partnership with Business." (London: DTI, 1997)
5. Department of Trade and Industry. b'Competitiveness: How the Best UK Companies are Winning." (London: DTI, 1997)
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6. IME. "Legal and Regulatory Reform: Impact on Private Sector Growth." Occasional paper prepared for USAID (IME, Sofia, 2000)
7. Kopeva, D., S. Kyrilova, and A. Bankov. "Status and Analysis of the Bulgarian Food Industry." (IME, Sofia, 1998)
8. Kopeva, Diana. "Bulgarian Food Industry: Inquiry Results and Case Studies." Occasional Paper for project on Competitiveness of the Bulgarian Food Industry in EU markets. (IME, Sofia, 1998)
9. Rasmussen, Lauge, and Felix Rauner. "Industrial Cultures and Production: Understanding Competitiveness." (London: Springer-Verlag, 1996)
10. Wignaraja, G. "Manufacturing Competitiveness With Special Reference to Small States- in Commonwealth Secretariat." Small States: Economic Review and Basic Statistics, (London: Commonwealth Secretariat, 1997)
Competitiveness Implementation Experience
1. Charles, D., and P. Benneworth. "A Review of Regional SWOT Analyses." (Report by Newcastle University's Center for Urban and Regional Development Studies for European Economic Development Services: Newcastle-upon-Tyne, 1997)
2. Department of the Environment, Transport and the Regions. "Building Partnerships For Prosperity: Sustainable Growth, Competitiveness and Employment In The English Regions." (London: Stationary Office, 1997)
3. European Commission. "Employment, Growth and Competitiveness: Solidarity In The UKn (EC, 1997)
4. Ffowcs-Williams I. "New Zealand: The Internationalization of Competition and the Emergence of Networks." Networks of Enterprises and Local Development. (Paris, OECD, 1996)
5. Figueroa, Adolfo. "Equity, foreign investment and international competitiveness in Latin America." Quarterly Review of Economics and Finance- 38, no. 3 (Fall 1998): pp.39 1-408
6. Fleury, Afonso. "Quality and productivity in the competitive strategies of Brazilian industrial enterprises: Part of a special issue on industrial organization and manufacturing competitiveness in developing countries." World Development- 23 (January 1995): pp.73-85.
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7. Hughes, Gordon, and Paul Hare. "The International Competitiveness of Industries in Bulgaria, Czechoslovakia, Hungary, and Poland." Oxford Economic Papers- 46, (April 1994): pp.200-22 1.
8. Jacquemin, Alexis, and Lucio Pench. "Europe Competing in the Global Economy: Reports of the Competitiveness Advisory Group." (Edward Elgar, Cheltenham, 1997)
9. J.E. Austin Associates, Inc. "Uganda Country Competitiveness Analysis." (USAID/ Global Bureau, 1998)
10. J.E. Austin Associates, Inc., and SRI International. "Sri Lanka Competitiveness Study: Final Report for US AIDISri Lanka." (PricewaterhouseCoopers, 1998)
11. Lall, S. "Learning from the Asian Tigers: Studies in Technology and Industrial Policy." (London: Macmillan, 1997)
12. Lall, S., and G. Wignaraja. "Mauritius: Dynamising Export Competitiveness." Commonwealth Economic Paper No 33 (London: Commonwealth Secretariat, 1 998)
13. Lall, S., G. Wignaraja, M. Sellek, and P. Robinson. "Zimbabwe: Enhancing Export Competitiveness." (London: Commonwealth Secretariat [mimeo], 1997)
14. Low, L. uWorkers' Participation in Productivity Improvement at Enterprise, Sector and National Levels: The Singapore Experience." (Singapore: Singapore Institute of Labour Study, undated)
15. Maskell, Peter, et al. "Competitiveness, Localized Learning and Regional Development: Specialization and Prosperity in Small Open Economies." Frontiers of Political Economy 14. (London and New York: Routledge, 1998)
16. Monitor Company. "Creating the Competitive Advantage of Venezuela, Phase I." (Ministry of Industry and Commerce, Caracas Venezuela, Summer 1996)
17. Monitor Group. "National studies: Colombia 1993." (Available at Ministry of Development and IF1 in Bogoth, 1993)
18. Monitor Group. "National studies: Bolivia 1996." (Available at the Ministry of Industry in La Paz, 1996)
19. Monitor Group. "National studies: Peru 1995." (Ministry of Trade and Industry and PromPeru in Lima, 1995)
20. Murphy, Kevin X., and the Association for the Development of Santiago (APEDI). uCompetitiveness Strategy for the Santiago Region." (Chemonics International, Inc., and J.E. Austin Associates, Inc., 2000)
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2 1. Nelson, Richard R., and Howard Pack. "The Asian Miracle and Modern Growth Theory." (The World Bank, 1997)
22. Sachs, Jeffrey, D., and Wing Thye Woo. "Executive Summery- The Asian Financial Crisis: What Happened, and What is to be Done." The Asia Competitiveness Report 1999. (World Economic Forum, 1999)
23. The World Bank, "World Bank Policy Research Report: The East Asian Miracle- Economic growth and Public Policy." (New York: Oxford Press, 1993)
24. WK Cabinet Office. "Competitiveness: Creating the Enterprise Centre of Europe." (London: HMSO, 1996)
25. Wignaraja, G. "Trade Liberalization in Sri Lanka: Exports, Technology and Industrial Policy." (London: Macmillan, 1998)
26. Wignaraja, G., and G. Ikiara. "Adjustment, Technological Capabilities, and Enterprise Dynamics in Kenya" in S. Lall, ed. The Technological Response to Import Liberalization in Subsaharan Africa. (London: Macmillan Press, 1999)
Competitiveness and Workforce
1. Commission of the European Communities. "Growth, Competitiveness, Employment: The Challenges and Ways Foreword into the 21'' Century." White Paper, Supplement 6/93. (Brussels, 1993)
2. Foders, Federico. "Regional Competitiveness And Training In Germany." (Institut fur Weltwirtschaft, Universitat Kiel, Kiel, 1997)
3. International Labor Office. "Chapter Five: Impact of Education and Training on Competitiveness and Growth." World Employment Report 1998-99. (International Labor Organization, 1998)
4. UNDP. "New Technologies and the Global Race for Knowledge." Human Development Report 1999 (New York: Oxford University Press, 1999): pp. 57-76
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Country-Specific Competitiveness Studies
Albania
1. Ceku, B., and K. Gorica. "Tourism in Transition, Hotel Chain." (AECR magazine No.2, 1999)
2. European Bank for Reconstruction and Development. "Regional Private Sector Initiatives in South East Europe." (March 2000)
3. European Investment Bank. "Basic Infrastructure Investments in South-Eastern Europe, Regional Project Review." (March 2000)
4. Gedeshi, I., and B. Aga. "Tourism in Albania - actual status and perspectives" (AECR magazine No3 and No. 4,1997)
5. Ministry of Economic Cooperation and Trade (MOECT). "Medium Term Strategy for Development of Small and Medium Size Enterprises in Albania" (1 999)
6. Ministry of Finance "Medium Term Expenditure Framework 2001-2003." (December 2000)
7. Muco, Ledia, and V. Spahiu. "Information Technology: Some current issues." (AECR magazine)
8. Organization for Economic Cooperation. "South East Europe Compact for Reform, Investment, Integrity and Growth." (March 2000)
9. World Bank. "The Road to Growth and Stability" Prepared by the World Bank staff in the fhme of the Stability Pact Initiatives. (Albania, March 2000)
10. Center for Economic Development. "Competitiveness of the Bulgarian Economy 1999." (Center for Economic Development,' 1999)
11. Gotchev, Atanas, ed., "The Competitiveness of Bulgarian Export Industries." (Department of International Relations Association, Sofia, 1997)
12. HIID. "Evaluating and Enhancing Bulgaria's Competitiveness." (US: HIID, 1999)
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13. IME. "Creating Competitiveness Clusters in Bulgaria: Factors, Visions and Strategies." Occasional Paper for WBI-IME Creating Competitiveness project. (IME, Sofia, 1999)
14. IME. "In Search of Growth: Bulgaria's Lesson's and Policy Options." Discussion paper for project Conditions for Long-term Growth and Prosperity in the Balkans. (ME, Sofia, 1999)
15. Institute for Market Economics. "The Most Viable Business Associations in Bulgaria." An Assessment Made for IME project Strengthening Bulgarian Business Associations (IME, 1996)
16. Pankow, Julian, Lubomir Dimitrov, and Piotr Kozarzewki. "Effects of Privatization of Industrial Enterprises in Bulgaria." Julian Pankow, ed. (Warsaw: Sofia, 1999)
17. Petkoski, Djordjija. "Vision of the Future: Bulgarians Reflect on their Competitive Future." (EDI: World Bank, Bank Operations, and Government of Austria)
18. Plod Ood, Sanchev, and Astera Ad. "How Companies apply Competitive Strategies in Unfavorable Initial Conditions: Two Case Studies from Bulgaria." (IME, EDI: World Bank, and World Bank Resident Mission, Bulgaria, 1997)
19. Rozenov, Rossen. "Investment and Savings: The Contribution of the Bulgarian Private Sector." Discussion paper for IME project Hidden Barriers to Economic Growth on the Balkans. (IME, Sofia, 1996)
20. Yonkova, Assenka, Svetlana Yanakieva, and George Stoev. "2000: Common Country Assessment." Occasional paper for UNDP, (IME, Sofia, 2000)
2 1. Croatian Chamber of Economy, Department of Manufacturing Industry. "Prijedlog strategije industrijskog razvitka Hrvatske 'Hrvatska u EU 2006' (A Proposal for the Strategy of Industrial Development of Croatia 'Croatia in the EU by 2006)." (Zagreb: Croatian Chamber of Economy, 2000)
22. Dragitevik, M., S. Cihar, and M. Serif. "Competitiveness of Croatian Hotel Sector." Revue de Tourism /, The Tourist Review / Zeitschrift fur Fremdenverkehr: Vol. 54 (2). (1999): pp. 30-40.
23. Herjavec, A. "Analiza stanja nage tekstilne i odjevne industrije (Analysis of State of our Textile and Cloth Industry)." Ekonomskipregled, Vol. 50 (10). (1999): pp. 1300-1309.
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24. KneieviC, A. "StrateSka analiza konkurentnosti tekstilne industrije Hrvatske (A Strategic Analysis of Competitiveness of the Textiles Sector in Croatia)." (Zagreb: The Institute of Economics, 1993)
25. LenardiC, M. "Pristup konkurentnosti gospodarstva i strategka analiza pojedinih industrijskih sektora Hrvatske (An Approach to the Analysis of the Competitiveness of the Croatian Economy and Strategic Analysis of Particular Industrial Sectors)." Z. BaletiC, ed. Hrvatsko gospodarstvo u tranziciji, (Zagreb: The Institute of Economics, 1999): pp. 257-272
26. LenardiC, M. "StrateSka analiza konkurentnosti industrije telekomunikacija Hrvatske (A Strategic Analysis of Competitiveness of the Telecommunications Industry in Croatia)." (Zagreb: The Institute of Economics, 1993)
27. LenardiC, M. and K. Jurlin. "An Analysis of the Competitiveness of Selected Industrial Sectors in Croatia." V. Sarnardiija, M. StaniEiC, and G. NikiC, eds. Hrvatska i Europsku unija: koristi i troSkovi integriranja 1 Croatia and the European Union: Costs and Benefits of Integration. (Zagreb: Institute for International Relations, 2000): pp. 193 - 207.
28. LenardiC, M., and M. CimeSa, eds. "The Competitiveness of Croatia: Shaping of the Restructuring Policy." (Zagreb: The Institute of Economics, 1996)
29. NestiC, D., ed. "Pokazatelji medunarodne konkurentske sposobnosti hrvatskog gospodarstva i politika teEaja (The Indicators of International Competitiveness of the Croatian Economy and the Exchange Rate Policy)." (Zagreb: The Institute of Economics, 1999)
30. NikiC, G. "Promjene u strukturi ekonomske razmjene Hrvatske s inozemstvom u razdoblju stabilnosti cijena 1994.-1998 kao indikator promjena izvozne konkurentnosti (Changes in the Structure of Croatian Foreign Trade in the Period of Price Stability [1994-19981 as Indicators of Changes of Export Competitiveness)." Z. BaletiC, eds. Hrvatsko gospodarstvo u tranziciji. (Zagreb: The Institute of Economics, 1999): pp. 549-567.
3 1. PeruSko, D. "StrateSka analiza konkurentnosti brodogradnje Hrvatske (A Strategic Analysis of Competitiveness of the Shipbuilding Sector in Croatia)." (Zagreb: The Institute of Economics, 1993)
32. RadoSevic, S., M. CimeSa, and M. Lenardic, eds. "The Competitiveness of Croatia: Basic Guidelines for a Policy of Economic Restructuring." (Zagreb: The Institute of Economics, 1993)
33. SkufliC, L. "Medunarodna strategka orijentacija i trgovinska politika Republike Hrvatske (International Strategic Orientation and Trade Policy of the Republic of Croatia)." PhD. dissertation. (Rijeka: The Faculty of Economics, 1999)
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34. SkufliC, L., and I. ~ersan-Skabi~."Ocjena poloZaja i perspektive hrvatskih izvoznika na europskom triiS.tu (An Evaluation of the Competitive Position and of the Opportunities of Croatian Exports in the European Market)." Ekonomski pregled, Vol. 50 (12). (1999): pp. 1842 - 186 1.
35. SriCa, V., ed. "E-Croatia: Prijedlog strategije informatizacije Hrvatske (E- Croatia: A Proposal for the Strategy of ICT Development)." (Zagreb: Office of the President, 2000)
36. The World Bank: Albania and Croatia Country Office. "A Policy Agenda for Reform and Growth." Vol. 2. (2000)
37. TipuriC, D., ed. "Konkurentska sposobnost poduzeka (The Competitiveness of Business Enterprises)." (Zagreb: Sinergija, 1999)
38. USAID "Concept Paper 2000-2004." (USAIDI Croatia, 2000)
39. USAIDICroatia. "Croatia: ICT Assessment." (2000)
Macedonia
40. CPI OK0 Management Consultants Plc. "Assessment of the Macedonian Small Business Environment with Competitive Country Diamonds of Select Industry Sectors" (for the World Bank Institute, 1998)
41. EUIPhare. "Overview of SME Sector Legal, Institutional and Organizational Environment" (Phare Approximation Law, July 1998)
42. Euro Jop Data. "Flash Dossier FYROM" (Luxembourg, October 1999)
43. GTZ - DEG. "Strategic Approach for the Development of SMEs in the RM." (July 2000)
44. OECD for Stability Pact. "Country Fact Sheets." (Paris, July 2000)
45. OECD. "Investment Guide for Former Yugoslav Republic Of Macedonia" (April 1998) 46. Petkoski, Djordjija. "Vision of the Future Program - Macedonians Reflect on their Competitive Future" (World Bank 1 World Bank Institute, 1997198)
47. Shumkovski, Gradimir. "Rainbow Cluster - Macedonian Agribusiness Pilot Cluster Feasibility Study." (For the World Bank Institute, 199912000)
48. USAID. "Quantitative Analysis of Trade Liberalization." (October 2000)
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49. USDOLAlab and ILOLED Program. "Entrepreneurial Initiatives for Local Economic Development." (October 1998)
Romania
50. "Romania - Strategia Nationala pentru Dezvoltare Durabila (Romania - National Strategy for Sustainable Development)" Romanian Government paper produced by the Working Group established by Government Decision no. 305/15.04.1999. (Bucharest, 1999) 5 1. Anton, Ion, ed. "Competitive Advantage of Regions. Enterprise Clusters in IT, Shipbuilding and Wood Processing." (Bucharest: ICESIUniversity of Bucharest Publication, 1999)
52. Anton, Ion, coordinator. "Competitive Analysis Manufacturing Survey." (Bucharest: ICESIUniversity of Bucharest- Prepared for the Center for International Private Enterprise, 2000)
53. Anton, Ion, ed. "Romanian Enterprise Development Program. Pilot Clusters of Enterprises: Software - Bucharest, Shipbuilding - Constanta County, Agribusiness - Braila County, Shoe Manufacturing - Timis County, Car Manufacturing - Arges County, Wood Processing - Neamt County." (Bucharest: International Center for Entrepreneurial Studies 1 University of Bucharest Publications, 1998)
54. Commission on Romania's Progress Towards Accession. "Romania 2000." Regular Report. (Brussels, November 8,2000)
55. Department for International Development (DFID). "Romania - Country Strategy Paper." (London, 2000)
56. Institute for Democracy and Electoral Assistance (IDEA). "Democracy in Romania." (Bucharest: Humanitas, 1997)
57. OECD. "Economic Surveys - Romania 1998" (Paris: OECD Publications, 1998)
58. Petrovski, Djordjia. " Romanians Reflect on Their Competitive Future." (The Economic Development Institute of the World Bank/ Bank Operations and the Government of Austria, 199711998)
59. Romanian Academy and United Nations Development Program (UNDP). "Romania - 2020." (Bucharest: Conspress, 1998)
60. Romanian Government. "Program de Guvernare pe perioada 2001-2004 (Governing Program for the period 2001-2004)." Oficial Paper. (Bucharest, December 22,2000)
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61. Romanian Government. "Romania - Strategia de dezvoltare pe termen mediu 2000-2004 (Romania - Medium Term Development Strategy 2000-2004)." Wcial Document. (Bucharest, March 2000)
62. Voiculescu, Dan, and Cezar Mereuta, eds. "Analiza de Competitivitate a Economiei Romanest; (Competitiveness Analysis of the Romanian Economy)." (Bucuresti: Editura Academiei Romane, 1998) Southeast Europe
63. Beilock, R., and Z. Blagoeva. "Hidden Barriers to Development in the Balkans: International Road Transportation." Occasional paper for IME project Hidden Barriers to Economic Growth on the Balkans. (IME, Sofia, 1997)
64. Dirnitrov, Lubomir. "Improvement of the Mass Privatization Legislation." Discussion paper for IME project Hidden Barriers to Economic Growth on the Balkans. (IME, Sofia, 1997)
65. Stanchev, K., P. Petrova, and D. Michailov. "Barriers to Free Enterprise: An Empirical Survey." Occasional paper for IME project Hidden Barriers to Economic Growth on the Balkans. (IME, Sofia, 1997)
66. Stanchev, Krassen. "The Balkans in 2010: Economic Scenarios." Discussion paper for CLS conference Facing the Future: The Balkans in Year 201 0. (IME, Sofia, 1999)
Current Webography of Competitiveness Resources
1. http://europa.eu.int/comm/enterprise/enterise policy/competitiveness/ EU White Paper on competitiveness policy.
2. http://www.compete.org/ US Council on Competitiveness: Includes a benchmarking of US competitiveness and descriptions of an ongoing cluster analysis project led by Michael Porter.
3. http://www.cid.harvard.edu/andesl Harvard's Andean Competitiveness Project: With leadership fiom Jeffrey Sachs and Michael Porter. See especially the project description and outline. 4 http://wblnOO 18.worldbank.org/psd/compete.nsf/d3fel ba 1940fl3908525650d005355 4f/c2b07fOad3cc44d68525650d00536564?0~ World Bank Competitiveness Indicators: Data available for nearly all countries.
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5. http://www.competitiveness.org The Competitiveness Institute, a professional group for cluster development advisors, which held its first international conference on cluster development in Barcelona in 1998. Most resources available only to members.
6. http://www.competitiveness.com Competitiveness.com is an international group with headquarters in Barcelona, specialized in the implementation of business to business vertical portals with a cluster approach.
7. http://www.cofi.orcr/blueprint.html Blueprint for competitiveness in forestry products for British Columbia, Canada.
8. http://www.dist.gov.aulittjtskforcelallen/index.html Extensive report from 1997 on competitiveness of information industries in Australia.
9. httr,://www.chan~inmations.com/new/wldbnk.zip Changingnations.com (Monitor Group) World Bank training manual on discussing and fostering competitiveness.
10. http://www.ci~e.orrz/mdfl997/advantge.htm Michael Porter comments on ten of the most important preconditions to improving competitiveness in a country (or geographic area). They are most applicable in cases where a country is conducting a formal project to enhance competitiveness.
1 1. http://www.worldbank.or~wbi/mdf/mdfl/product.htm- The World Bank Group internet site presenting the selections from the Mediterranean Development Forum: Knowledge and Skills for Development in the Information Age held at Morocco between May 12- 17, 1999.
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Selected Organizations Undertaking Studies and Assessments of Competitiveness
1. The Organization for Economic Co-operation and Development, 2 rue Andre Pascal, 75775 Paris, CEDEX 16, France.
2. The International Labor Office, 4 route des Morillons, CH-1211, Geneva 22, Switzerland.
3. The World Bank, 18 18 H Street, N. W., Washington DC 20433, USA.
4. IMD International, P.O.Box 9 15, Chemin de Bellervive 23, CH-1001, Lausanne, Switzerland.
5. International Trade Center, 54-56 rue de Montbrillant, 1202 Geneva, Switzerland.
6. The Commonwealth Secretariat, Marlborough House, Pall Mall, London SW 1 9SY, England.
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